Fed Holds Rates at 3.5%-3.75% as Powell Plans to Stay Through DOJ Probe

What Happens Next

• →The Fed's hold at 3.5%-3.75% with only one cut projected in 2026 keeps borrowing costs elevated, pressuring rate-sensitive sectors such as commercial real estate and small-cap equities reliant on refinancing in the next 12 months.
• →Powell's commitment to remain through the DOJ probe delays any White House attempt to install a more dovish successor, anchoring current restrictive policy orientation and reducing the probability of accelerated easing through at least mid-2026.
• →If the Fed follows Brainard's suggested framework and treats oil price shocks from Middle Eastern conflict as transitory, it risks under-tightening in the event of a sustained supply disruption, potentially allowing headline inflation to re-accelerate above target in energy-dependent economies.

Near-term: Elevated borrowing costs from the rate hold squeeze refinancing activity in commercial real estate and leveraged corporate debt, with credit spreads widening 15-30 basis points over the next quarter. Long-term: Repeated treatment of energy supply shocks as transitory erodes the credibility of central bank inflation-targeting frameworks, pushing long-term inflation expectations higher and forcing structural revisions to forecasting models across G7 central banks.