Powell Hits Pause — and Raises the Bar: Why the Fed’s “Neutral” Talk Sounds More Hawkish Than It Looks

The Federal Reserve delivered a widely expected hold on interest rates Wednesday, but Chair Jerome Powell’s press conference added a subtly hawkish tone beneath the calm. While the door to further rate cuts remains open, Powell made clear the Fed is increasingly comfortable that policy is already near neutral—and in no hurry to move again without clearer evidence from the data.

The Fed's January decision was widely viewed as a non-event on the surface, but Chair Jerome Powell’s press conference added important nuance beneath the calm. As expected, the Fed held the target range for the federal funds rate steady at 3.50%–3.75%, delivering no immediate policy surprise. Markets ultimately interpreted the outcome as a slightly hawkish hold: the door to further rate cuts remains open, but the bar for easing has quietly moved higher.

The central theme of the press conference was the neutral rate—and the Fed’s growing comfort that policy is now close to it. Powell repeatedly emphasized that, after three rate cuts totaling 75 basis points since September, the Committee believes policy has done much of the “normalization” work already. “We are well positioned to determine the extent and timing of additional rate adjustments,” Powell said, stressing that policy is now “within the range of plausible estimates” of neutral, even if it sits toward the upper end.

That distinction mattered. Powell pushed back on the idea that policy remains meaningfully restrictive, saying it is “hard to look at the incoming data and say that policy is significantly restrictive at this time.” Instead, he characterized the stance as “loosely neutral or somewhat restrictive,” adding a crucial caveat: “It is in the eye of the beholder and, of course, no one knows with any precision.” In other words, the Fed is no longer convinced it needs to keep cutting simply to get back to neutral—and that marks a shift from late 2024 thinking.

Economic data have given policymakers room to pause. Powell described the growth outlook as materially stronger than at the previous meeting, saying “everything comes in suggesting that this year starts off on a solid footing for growth.” He also noted that the Beige Book and broader incoming data point to resilience rather than deceleration. This language represents a clear upgrade from December, when growth was described as expanding at a “moderate pace.”

The labor market narrative has also improved. Powell acknowledged that hiring has slowed, but said “some of the labor market data came in suggesting evidence of stabilization.” He added that “the unemployment rate is broadly stable,” and suggested that productivity gains may be helping reconcile the divide between solid growth and softer hiring. Importantly, the Committee removed its prior emphasis on rising downside risks to employment—a subtle but meaningful change in tone.

Inflation, meanwhile, is no longer framed as re-accelerating. Powell said “inflation performed about as expected,” while still describing it as “somewhat elevated.” He emphasized that much of the prior inflation overshoot was tariff-related and likely temporary: “Most of the overrun in inflation is from tariffs, not demand,” and those effects are expected to peak and fade. “If we see that [tariff inflation topping out],” Powell said, “that would tell us we can loosen policy.”

This combination—firmer growth, a stabilizing labor market, and inflation behaving largely as expected—helped deflate the stagflation narrative that gained traction in late 2024 and early 2025. Powell explicitly rejected the idea that financial conditions are tight, noting that the economy has “once again surprised us with its strength” and that inflation expectations “show we have credibility.” He added that short-term inflation expectations have “fully retraced,” while longer-term expectations “reflect confidence in return to 2% inflation.”

On future rate cuts, Powell was careful but clear. “Monetary policy is not on a preset course,” he said, reiterating that decisions will be made “meeting by meeting.” He confirmed that the Committee has “not made any decisions about future meetings,” but acknowledged that most officials still see some additional normalization over time. Crucially, there is no urgency. “We are well positioned after the three cuts to let the data speak to us,” Powell said.

Asked directly about the possibility of cutting again, Powell said there was “broad support on the Committee for holding today,” including among non-voters, though some officials dissented in favor of additional easing. He stressed that the Fed is “not trying to articulate a test for when to next cut,” underscoring a shift away from forward guidance and toward patience.

From a market perspective, this explains why the meeting landed as a modestly hawkish hold. Rate hikes are clearly not on the table—Powell said “no one’s base case is a rate hike”—but the Fed no longer sounds eager to cut simply for insurance. The threshold for easing appears higher, requiring either clearer labor market deterioration or more convincing disinflation once tariff effects fade.

The statement itself reinforced that message. January’s language upgraded growth from “moderate” to “solid,” softened concerns about the labor market, and removed references to a “shift in the balance of risks.” Inflation language was de-escalated, and operational balance-sheet language was dropped entirely. Voting dynamics also narrowed, signaling reduced internal urgency to move.

The bottom line is straightforward: the Fed is comfortable sitting where it is. Powell made clear that policy is near neutral, the economy is holding up better than feared, and inflation risks are easing rather than intensifying. While additional cuts remain possible—likely two over time if conditions cooperate—the Fed is in no rush. For now, patience is policy, and data—not promises—will determine the next move.