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The Federal Reserve held interest rates steady on Wednesday amid what U.S. central bank chief Jerome Powell described as a solid economy and diminished risks to both inflation and employment. This outlook could signal a lengthy wait before any further reductions in borrowing costs.
"The economy has once again surprised us with its strength," Powell said at a press conference after Fed policymakers voted 10-2 to hold the central bank's benchmark interest rate in the 3.50%-3.75% range following a two-day meeting.
Noting broad internal support for the decision, Powell said the Fed remains "well-positioned" to assess when or whether another rate cut may be needed.
"There could be combinations, infinite numbers of combinations that would cause us to want to move," he said, with labor market weakening or inflation heading back down to the Fed's 2% goal as two of those possibilities.
Since the Fed's last policy meeting in December, when it delivered a third straight rate cut, "the upside risks to inflation and the downside risks to employment have diminished. But they still exist," Powell said. "We think our policy is in a good place."
Both Governor Christopher Waller, a contender to replace Powell when his term as central bank chief ends in May, and Governor Stephen Miran, on leave from his job as an economic adviser at the White House, dissented in favor of a quarter-percentage-point rate cut.
The actual rate decision, which was widely expected by financial markets, was overshadowed during the post-meeting press conference as reporters questioned Powell about threats to Fed independence and whether he intended to stay on at the central bank after his term as central bank chief ends in May, a possibility given new life after the Trump administration opened a criminal investigation into him earlier this month.
President Donald Trump has excoriated the Fed and Powell for failing to deliver the large rate cuts the president believes are needed to stimulate the economy.
Powell said at the time that the probe was aimed at pressuring the central bank to cut rates in line with the president's preferences. The Fed chief on Wednesday declined to comment further on the matter.
But he did have some advice for his successor: "Don't get pulled into elected politics," Powell said, adding that the next Fed chief also should work hard at being accountable to Congress, which oversees the central bank.
The exterior of the Marriner S. Eccles Federal Reserve Board building is seen in Washington, D.C., U.S., June 14, 2022. REUTERS/Sarah Silbiger/File Photo Purchase Licensing Rights
INFLATION REMAINS ABOVE TARGET, LABOR MARKET STABILIZING
The statement from the policy-setting Federal Open Market Committee offered no hint about when another rate cut might come, noting that "the extent and timing of additional adjustments" to the policy rate would depend on incoming data and the economic outlook, phrasing that Powell also used in his remarks.
"We expect the Federal Reserve to remain on an extended pause. Interest rates are close to neutral, and labor market conditions are stabilizing," Michael Pearce, chief U.S. economist at Oxford Economics, wrote after the policy decision, anticipating that an eventual decline in inflation, still running about 1 percentage point above the Fed's target, would lead to rate cuts in June and September.
That outlook would likely push the next rate decision to Powell's successor, who is expected to be nominated by Trump soon and confirmed by the Senate in time to lead the June 16-17 meeting.
It may not be a clear-cut decision if price pressures have not begun declining by then. Inflation has shown little progress over the past year and remains "somewhat elevated" in the view of Fed officials who believe prices are still rising because of the Trump administration's imposition last year of new tariffs on imported goods.
Powell said he expects the tariff impact to fade by the middle of this year. If that doesn't happen, it could pose an immediate dilemma for his successor's management of a policy committee scarred by the rapid rise in prices that followed the COVID-19 pandemic and concerned that five years of above-target price increases may make inflation harder to control in the future.
So far, however, Powell says inflation expectations remain in check, allowing the Fed to watch in particular whether the market remains stable.
Though the Fed noted on Wednesday that "job gains have remained low," policymakers also removed language from their prior statement saying that downside risks to employment had risen - an indication they as a group are becoming less worried about a rapid downturn.
Fed officials ahead of this week's meeting had largely characterized the job market as roughly in balance, with the smaller job gains matching the slower growth in the numbers of those seeking employment as a result of the Trump administration's stricter immigration policies. The unemployment rate in December fell to 4.4%.
Major U.S. stock indexes lost a bit of ground after the release of the policy statement and closed largely flat. The yield on the 10-year Treasury note ticked up to around 4.25%, while the yield on the two-year Treasury note was largely unchanged at around 3.57%. Interest rate futures moved to price in the next Fed rate cut at the June meeting.
The dollar snapped higher, and Wall Street wobbled on Wednesday, but not before the S&P 500 broke above 7,000 points for the first time, after the Federal Reserve kept interest rates on hold and flagged rising inflation risks.
More on that below. In my column today, I look at who the most likely candidates are to reduce their exposure to U.S. assets as a 'Sell America' narrative gathers momentum. Countries with big nominal holdings, or countries with outsized exposure to U.S. markets?
Today's Talking Points
* Hawkish veer to Fed's steer
"An absolute snoozefest." That's how TS Lombard's Dario Perkins summed up today's Fed meeting and Chair Jerome Powell's press conference, as the central bank kept rates on hold as expected. The steer was slightly hawkish - inflation remains elevated, and the job market looks a bit sturdier - but there was little market reaction.
Traders still expect another quarter point cut by July, but aren't fully pricing in another one after that. This fits with Powell's view that policy is probably at the higher end of the neutral range. Chances of the next move being a hike? No one's "base case", Powell says.
* U.S. reaffirms 'strong dollar' policy
U.S. President Donald Trump, Treasury Secretary Scott Bessen,t and others have weighed in on the dollar's travails, and investors are nervous the selloff snowballs into a rout. Policymakers seeing their currencies supercharge in value will be too.
The dollar got some respite on Wednesday, but the selling pressure is likely to return. It is still overvalued on a long-term, fundamental basis, although by how much is open to question. The last 24 to 48 hours have seen huge swings in FX volatility. Investors should expect more of that, too.
* 3 out of 4 ain't bad
U.S. tech results are rolling in, and so far, it's looking good - investors cheered Meta (META.O), Tesla (TSLA.O) and IBM (IBM.N), but not Microsoft (MSFT.O). Belief in the economic transformative power of AI is broadly intact. But there are a few chinks of shade amid the blinding light.
First, the downside of a productivity boom - job losses. Amazon (AMZN.O) and UPS (UPS.N) have announced huge layoffs, and others will likely follow. Second, big tech has lagged in recent months, ceding market leadership to other sectors. Many leading tech stocks remain well off their all-time highs - a sign of fatigue, or room to play catch up?
What could move markets tomorrow?
- Japan consumer confidence (January)
- Chinese Premier Li Qiang meets UK Prime Minister Keir Starmer
- Euro zone sentiment indices (January)
- Sweden's interest rate decision
- U.S. Treasury auctions $44 billion of 7-year notes
- U.S. weekly jobless claims
- U.S. durable goods (November)
- U.S. trade (November)
- U.S. earnings (busiest day of the season), including Apple, Visa, Mastercard, Caterpillar, SAP, Blackstone
Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.
Predictions are hard, except about the predictions market. Venues enticing punters to wager on their prognosticative prowess, like Kalshi and Polymarket, are enjoying surging momentum. As they grow, titans of old finance, including NYSE owner Intercontinental Exchange (ICE.N), will be tempted to roll the dice on M&A. Underlying it all is event-probability data and frenzied retail trading, catnip for Wall Street.
Kalshi and Polymarket’s popularity exploded after the 2024 U.S. presidential election when, contrary to averages of public opinion polls, their real-time probabilities favored eventual winner Donald Trump. The following year, in 2025, prediction markets saw $47 billion in global trading volume, according to analysts at brokerage Clear Street. CNN broadcasts and The Wall Street Journal now regularly cite their data.
Predictions are structured as binary yes-or-no contracts, asking anything from “will it rain in New York City today?” to “will Rick Rieder be nominated to chair the Federal Reserve?” The price of a contract fluctuates between 0 and 100 cents depending on order flow, corresponding to the percentage probability the market ascribes to an event happening. When an outcome is confirmed, “yes” or “no” pays out.
Venture capital firms see this oddball take on futures-contracts-for-everything as a winner. Between just October and December, Kalshi’s valuation more than doubled to $11 billion. Polymarket, too, is in talks to raise funds at a valuation between $12 billion and $15 billion, according to Bloomberg.
There are differences between the two: Clear Street foresees Kalshi’s take rate, or the fees and commissions that it collects from trades through its own platform and brokerages, coming in at about 2% of volume. At Polymarket, analysts estimate the rate could eventually settle at 0.5%. Given an estimated $96 billion and $84 billion in anticipated trading volume in 2026, their valuations would work out to 6 times some $1.9 billion in revenue for Kalshi, but a much richer 32 times Polymarket’s potential $420 million. Traditional exchange operators like ICE and CME trade at about 11 and 15 times expected sales over the next 12 months, according to Visible Alpha.
The divergence comes down to Polymarket’s unique structure, which is based on the blockchain technology powering cryptocurrencies. It says it charges no fees on a "vast majority" of contracts. Nonetheless, the valuation differential perhaps reflects expectations of convergence.
Certainly, the platforms resemble each other in one crucial way. Much of today’s action is driven by a familiar craze: sports gambling. About 90% of predictions trading volume is sports-related, the Financial Times reported. An independent analysis of Kalshi by Jonathan Becker, puts the share at 73%. It wouldn’t be a surprise if Kalshi and Polymarket are major advertisers at this year’s Super Bowl and FIFA World Cup.
That pressures traditional sports books, which juggle a 50-state regulatory patchwork, punitive local and federal taxes, and charge hefty commissions of 5% or more to offset house risk. Predictions markets, conversely, are overseen by the Commodity Futures Trading Commission and match users’ bets against each other, rather than taking on the dangers of a wager themselves.
Legal troubles for predictions markets may yet slow them down: multiple U.S. states and Native American tribes are suing Kalshi, claiming it violates gaming regulations. Even if the company prevails, though, Morgan Stanley (MS.N) analysts see sports-betting incumbent DraftKings (DKNG.O) only losing maybe $145 million in EBITDA in the markets in which it currently operates to the upstarts, about 14% of next year’s anticipated total. Analysts expect even that might be offset by the up to $200 million the company could earn from large lucrative states like California, Texas, and Florida opening up, assuming a 30% share.
Just ending up as a new venue for sports wagers would be a disappointing end. The utility of truly flexible, comprehensive predictions contracts would be far larger. Much as futures markets help, say, manufacturers hedge wild swings in the prices of steel or lumber or coal, or airlines avoid a sudden increase in fuel costs, a truly liquid predictions market could, in theory, offer protection against any number of outcomes. In the most optimistic case, these markets could be a kind of hive-mind crystal ball, their data valuable to Wall Street traders and analysts trying to scry the future.
The platforms are nowhere near this point yet. Aside from anything else, a crucial problem is liquidity. Kalshi and Polymarket effectively mimic exchanges, and need brokers such as Robinhood Markets to drum up traders and market makers to provide volume, especially for niche contracts. Without it, contract pricing - and with it, any predictive value - will be hopelessly inefficient.
Kalshi has already signed up Jeff Yass-run quantitative trading giant Susquehanna International, which in turn is staffing up predictions trading desks. Market-makers enjoy a lucrative trade taking the opposite side of over-excitable retail punters, and research shows that traders regularly overpay for long-shot bets.
Traditional exchange operators like ICE and CME have both the experience and motivation to muscle in here. The NYSE-owner, for instance, already pays about $1 billion annually in liquidity rebates to the likes of Citadel Securities and Virtu Financial. That secures a valuable service, improving pricing and tightening spreads between buyers and sellers, thereby strengthening their exchanges. That operational nous could be put to use defending their enviable operating profit margins, which may face pressure if clients just move to trading on financial outcomes through predictions markets.
These exchange veterans also suffer key weaknesses. Their traditional, institutional clients usually trade products through prime brokers, not retail-style platforms. They are, in a sense, out of their depth in the retail-first predictions game. Partnering makes more sense than building their own platforms. This explains some early deals: NYSE’s parent has backed Polymarket, while CME struck a deal with FanDuel, which has launched its own market.
Any straightforward acquisition may have to wait for lawsuits to clear. If the result is favorable, though, it could spur traditional exchange operators to make an M&A wager.
Context News
- Kalshi said on December 2, that it had raised $1 billion in a financing round, more than doubling its valuation to $11 billion in about two months.
- Polymarket is in early discussions with investors and looking to raise funds at a valuation between $12 billion and $15 billion, Bloomberg reported on October 22, citing people familiar with the matter. Intercontinental Exchange said on October 7 that it would invest up to $2 billion in Polymarket.