As Federal Reserve Chair Jerome Powell's term approaches its conclusion, the U.S. central bank's policy stance is stabilizing. Powell stated during a Wednesday press conference that he believes he is leaving the economy on "a solid foundation," signaling that the Fed may enter an extended period of pausing interest rate cuts. Following the Federal Open Market Committee (FOMC) meeting held on January 27-28, the Fed voted 10-2 to maintain the federal funds rate within the 3.5% to 3.75% range. This follows a cumulative 75 basis points of rate cuts implemented in the second half of last year.

Fed Governors Waller and Mester cast dissenting votes this week, advocating for an additional 25 basis point cut. The policy statement revealed that the FOMC upgraded its description of economic growth from "moderate expansion" in December to "solid growth," noting that job gains, while still low, show signs of stabilizing unemployment. Furthermore, the Fed removed previous language about increased downside risks to the labor market, instead emphasizing that inflation "remains somewhat elevated."

Powell reiterated to reporters that the current policy rate is within a "reasonable range near neutral levels," providing flexibility to respond to future data changes. Vincent Reinhart, Chief Economist at Dreyfus and Mellon and a former senior Fed official, suggested that the Fed's rate cuts last year were akin to "buying insurance" against further labor market weakness. However, with employment not deteriorating significantly and inflation still above target, this supports the Fed's decision to maintain the current policy stance.

Analysts from Morgan Stanley and Macquarie also view Powell's remarks as reinforcing the signal for a "higher-for-longer" pause, although markets still anticipate potential modest easing later this year. Powell's economic tone was notably more optimistic than in previous months. He highlighted continued resilience in consumer spending, sustained business investment, and rising productivity, while acknowledging that lower-income households are under pressure, forced to cut back spending and switch to cheaper alternatives.

He indicated that part of the recent economic momentum stems from upfront investments related to artificial intelligence. On inflation, Powell estimated the current rate remains around 3%, significantly above the Fed's 2% annual target. He attributed this primarily to tariffs pushing up goods prices but noted that disinflation in the services sector is continuing.

Powell suggested the most severe impacts from tariffs will likely fade by the end of this year and emphasized that "rate hikes are not part of anyone's baseline scenario." While Powell has previously warned there is "no risk-free path" for the Fed due to coexisting inflation pressures and potential labor market weakness, he adopted a more positive tone in this briefing.

Stephen Douglass, Chief Economist at NISA Investment Advisors, pointed out that Powell stressed diminishing stagflation risks, with both the upside risks to inflation and downside risks to employment having moderated. On political matters, Powell remained cautious. He declined to comment on Justice Department subpoenas, White House criticism, the U.S. dollar exchange rate, or whether he would remain on the Fed Board after his term as Chair ends, repeatedly stating, "I don't have any more information."

However, when asked about his personal attendance at the U.S. Supreme Court oral arguments regarding the Trump administration's attempt to remove Fed Governor Cook, Powell responded that it could be "the most important legal case in the Fed's 113-year history." He stated there is precedent for a Fed Chair attending such hearings and that appearing is easier to explain to the public than absence.

Powell also delivered extended remarks on central bank independence. He emphasized that independence is designed to protect the public from the risk of monetary policy being used for short-term political gain, and that once public trust is lost, it is difficult to restore. He added, "We have not lost that independence, and I don't believe we will."

Markets widely expect U.S. President Trump to announce Powell's successor in the coming weeks. Powell said he would offer his successor three pieces of advice: stay away from electoral politics, view communication with Congress as a core responsibility, and rely on the Fed's professional staff dedicated to the public interest.

Notably, the two dissenting votes at this meeting contrast with Powell's optimistic economic tone to some extent. Mester, a recent Trump appointee, has advocated for rate cuts at every meeting she has participated in. Waller's dissenting vote is more noteworthy due to the lack of obvious prior signaling. Reinhart believes this gives Waller's dissent greater significance. Waller is also considered one of four candidates Trump is evaluating for the next Fed Chair.