A resilient U.S. economy and steady job growth were enough to convince the Federal Reserve on Wednesday to pause its rate-cutting cycle, keeping its benchmark rate between 3.5% and 3.75%.
Federal Reserve Chair Jerome Powell said policymakers will continue adjusting rates one meeting at a time to assure the Federal Reserve to pause its rate-cutting cycle.
The Fed's decision came as no surprise to ABS experts, who expect policymakers to remain in a holding pattern for the foreseeable future.
"The Fed meeting did not give us any additional substantial information. My takeaway is that they are going to hold rates unchanged for the foreseeable future, maybe until the second quarter," said Tracy Chen, portfolio manager at Brandywine Global.
A hawkish Fed chair pick
There is little wonder why the Fed is expected to maintain its dovish stance, given the other signs of encouragement. The unemployment rate showed signs of leveling off, Inflation has also cooled since its 2022 peak, remaining above the Fed's 2% target.
I think the market overpriced the number of rate cuts this year.
The central bank is expected to maintain its independence even after June, President Trump's choice for a new Federal Reserve chair, Kevin Warsh, could take office if he passes Senate confirmation. Experts say the new Chair will likely not be able to sway the other members of the FOMC to move as aggressively as the president wants.
"I'm not so sure if the market has overpriced the number of cuts because my view on the economy is that it is on the trend of overheating," Chen said. "It's good for credit and, at the same time, short in duration, so we, as structured product investors, like short-duration bonds and floating rate bonds. I think the market overpriced the number of rate cuts this year."
The consumer outlook
During Powell's Wednesday press conference, he discussed how consumer spending is uneven across income categories. Higher-income individuals who tend to own real estate and stocks support spending over time. However, lower-income customers are also trading down in brands and changing their buying habits, he said.
Chen explained that, even though delinquencies in autos rose last year, the default rate remains very stable. People still have jobs, and even if they miss one or two payments, the delinquencies will be cured when they get a paycheck. Chen acknowledged, however, that the job market is worrisome with Amazon laying off 14,000.
This bifurcation is more structural. People who have assets are doing so well while people who have more debt than assets are in trouble
"Wealthy consumer households and AI spending definitely are the bulwarks behind the strong economic growth. We are starting to see the effects of AI on the job market," Chen said. "In the future, we will see human beings work together with AI as a tool."
John Kerschner, global head of securitized products and portfolio manager at Janus Henderson, agrees that other factors, such as tax refunds, could buoy consumer performance.
"Based on the persistent negative headlines, we believe that the market isn't pricing in the fact that Q1 2026 is going to be a cornucopia for consumers due to the One Big Beautiful Bill Act finally taking effect in 2026," he said. "This legislation manifests in lower tax withholding for consumers, combined with an average $1,000 increase in tax refunds (approximately plus 33%) according to the U.S. Department of the Treasury."
Additionally, he noted that Powell indicated at his press conference, and "we agree, that the job market isn't nearly as weak as many made it out to be three or four months ago," adding that this stimulus, combined with a slowly declining inflation rate, should give consumers, especially lower-end consumers, much-needed relief in the new year."
Chen explained that the bifurcation in credit performance is not an interest-rate issue but rather a structural one.
"It's not the interest rates," she said. "I think this bifurcation is more structural. People who have assets are doing so well while people who have more debt than assets are in trouble," Chen said.
