Fed Holds Rates Steady as Dollar Weakens

The US Federal Reserve kept rates unchanged, citing balanced inflation and labour risks, while dollar weakness offers room for ringgit appreciation and limited impact on Malaysia’s policy.

Fed Rates Steady

The Federal Reserve voted 10-2 to maintain the federal funds target range at 3.50–3.75% in its first meeting of 2026. Governors Stephen Miran and Christopher Waller dissented, favouring a 25-basis-point cut. Chair Jerome Powell reiterated that policy remains data-dependent, stressing the Fed is “well positioned” to observe economic developments. While GDP growth in Q3 2025 expanded at a robust 4.3%, consumer sentiment weakened, with confidence falling to its lowest since 2014. This divergence highlights uneven growth, where productivity gains from AI investment support output, but inflationary pressures and slower job creation weigh on household incomes. The Fed sees risks to inflation and employment as more balanced, pushing back expectations of rate cuts to mid-2026.

Dollar Index

Despite resilient US growth, the dollar index weakened by 1.8% to 96.5, reflecting market tolerance for a softer dollar under current policy conditions. This has supported regional currencies, including the ringgit, which strengthened 3.4% year-to-date to 3.92. Analysts expect continued USD softness to provide room for further ringgit appreciation, with limited spillover effects from the Fed’s decision. Gold prices also hit record highs, underscoring investor expectations of eventual easing. For Malaysia, the impact remains muted, with Bank Negara Malaysia’s Overnight Policy Rate (OPR) expected to stay at 2.75% throughout 2026, supported by firm domestic demand and improving external conditions.

Outlook

The Fed’s cautious stance reflects a wait-and-see approach amid mixed labour signals and inflation risks. Nonfarm payrolls rose modestly in December, while unemployment edged down to 4.4%, suggesting stabilisation. With Powell’s term ending in May, succession speculation adds uncertainty, with Rick Rieder seen as a dovish frontrunner. Markets anticipate two 25-bp cuts in June and July, bringing rates to 3.00–3.25% by year-end. For Malaysia, stronger transparency, regional fund flows, and ringgit resilience position the economy favourably, even as global sentiment remains measured.