The Federal Reserve announced today at its latest meeting that it’s holding short-term interest rates steady.
That decision keeps the federal-funds rate in a range of 3.5% to 3.75%.
The Fed decided to sit on rates at its first meeting of the year, after lowering them by 0.25 percentage points at each of its last three meetings of 2025.
Before those moves, the Fed had last lowered rates in December 2024. So the nation’s central bank has taken a measured pace at providing monetary stimulus to the economy over the last couple years.
The decision comes as the Fed wrestles with how to balance the competing demands of rising unemployment and sticky inflation. Inflation hasn’t declined to the Fed’s long-term target of 2%, after soaring to multidecade highs in the wake of the COVID-19 pandemic.
The Fed “is holding rates steady because the headline data shows the overall economy is fairly strong with solid and positive economic growth and inflation remains stubbornly higher than the Fed’s target,” Christine Sol, investment strategist at investment management firm Signature Estate & Investment Advisors (“SEIA”), told Stock Market Trends.
The Fed sees adequate economic growth and moderating inflation on the horizon. Even though inflation has been stubborn, the central bank expects it to ease. That should create a good environment for investors in the near term. Broadly, that’s a good thing for key asset markets, including stocks, bonds, and gold.
What Does the Fed’s Rate Decision Mean?
The current “low-hire, low-fire” economy kept the Fed on the sidelines.
“The Fed is seeing mixed signals in the economic data: a strong Q3 GDP reading, weakening jobs data, and inflation that is moderating but still higher than their target rate of 2%,” says Sarah DerGarabedian, CFA and director of investment strategy at Modera Wealth Management.
Unemployment has crept up from a year ago. It has risen from 4.1% in December 2024 to 4.4% last month.
Inflation has also remained above the Fed’s long-term target. In December, it hit 2.7% year over year. It hasn’t been close to the Fed’s target since the pandemic, though it has been trending lower over the past couple years.
This data puts the Fed in a tough position. Its dual mandate is to keep inflation at an acceptable level and to keep unemployment low – two goals that are usually at odds.
“These data make it difficult for the Fed to change the current rates and risk exacerbating inflation or further slowing the labor market,” says DerGarabedian.
One factor driving higher inflation has been President Donald Trump’s tariffs. A red-hot market for artificial intelligence is also keeping investment spending up. President Trump’s recent tax cuts have also boosted deficit spending – and therefore inflation.
But during this cycle, the Fed is also dealing with some unusual causes of inflation.
“Delayed tariff impacts, geopolitical volatility, and affordability concerns will exacerbate inflation,” says Sol.
International tensions that affect key commodities such as oil and President Trump’s attacks on the Fed’s independence are also hurting prices. The president’s interference with the Fed has led many analysts to expect an economy that’s allowed to “run hot” with higher-than-target inflation.
For now, cooler heads are prevailing at the Fed, closely balancing unemployment and inflation.
“The Fed is thinking, as long as there is consistent economic growth and inflation is persistent without surprises, [there is] no rush to lower rates without a justified basis,” says Sol.
How Does the Fed’s Decision Affect Stocks, Bonds, and Gold
Generally, lower interest rates are good for financial markets. Low rates make it easier for businesses to borrow and expand. They also induce investors to put their money into the market, particularly in stocks and other more risky kinds of investments, such as cryptocurrency.
Bond prices move inversely to interest rates, so lower prevailing rates generally raise the price of bonds. And as a defensive play, gold tends to do well with falling rates, too. Gold may do especially well when the economy hits a rough spot, making it a classic “safe haven” trade.
While the Fed held rates steady at this meeting, financial markets have already been looking ahead to the rest of the year. For the moment, the investing climate appears benign. Yes, unemployment and inflation are up, but the economy seems resilient, meaning the Fed may not make many adjustments to rates this year.
“Overall, the market is pricing in roughly one or two cuts – at maximum three rate cuts – this year,” says Sol.
With investors expecting corporate profits to continue to rise in 2026 and modestly lower interest rates on the way later in the year, the S&P 500 Index is off to a strong start.
And it seems like stock investors can win in some key (and more likely) economic scenarios:
- If the economy – and therefore inflation – cools somewhat, the Fed may be able to lower short-term rates, a positive for stocks and other asset markets.
- If the economy stays hotter, corporate profit growth is likely to remain robust – another positive for stocks – even if rates don’t fall as quickly as expected.
“The takeaway is that even though inflation is within expectations, this does not mean we are out of the woods when it comes to inflation,” says Sol. “If there is continued reacceleration in the economy, higher GDP can cause the markets to tolerate hotter inflation than we’d like, causing the Fed to keep rates steady for longer.”
So, stock investors may be rewarded if the Fed trims rates but should do well even if rates remain higher. This means that stocks have a good chance of extending their three-year winning streak in 2026.
That said, markets will keep an eye on the more extreme scenarios such as the potential for much higher inflation or a dramatic slowdown in the AI build-out or the broader economy.
How Should the Fed’s Move Impact Your Investing Strategy?
Analyzing interest rates and unemployment may make for good conversation, but it’s not all that necessary to succeed at investing.
“While it’s important to understand the Fed’s moves within a broader economic context, an investor’s primary focus should remain on whether their portfolio is set up to help them reach their personal financial goals,” says DerGarabedian.
For buy-and-hold types, it’s probably best to just stick to your long-term investing game plan. That may mean continuing to invest regularly in great individual stocks or even funds based on the S&P 500 Index and simply ignoring the noise.
But even a market decline can be welcome to forward-thinking investors. For example, for dividend investors, a decline means higher forward yields on any new money they add to their portfolio.
Either way, legendary investor Peter Lynch famously advised investors not to worry too much about the macro environment. “Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves,” said Lynch in a 1995 interview with Worth magazine.
The market offers many potentially lucrative investments, and they appear in any environment. While investors may be sweating a downturn, a decline in stock prices can be a great time to find new winners or add to your existing positions at discounted prices.
So, the market’s volatility can offer a lot of advantages for nimble investors, setting up the next profitable run for those who are poised to act – whether that’s in stocks, bonds, or gold.
Regards,
James Royal
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