The Federal Reserve held its benchmark interest rate steady at 4.25%-4.50% on Wednesday, a decision widely anticipated by markets, but the real focus of the day turned to Kevin Warsh, a key economic advisor, who declined to clarify the administration’s tariff policy. The combined effect gave the Japanese yen a fleeting moment of cover, with USD/JPY slipping below the 149.00 handle for the first time in a week.
Fed Holds Firm, Dot Plot Signals Caution
The Federal Open Market Committee (FOMC) unanimously voted to keep rates unchanged, citing persistent inflation running above the 2% target and a resilient labor market. The accompanying dot plot, released with the decision, showed a median projection for only one 25-basis-point cut in 2026, down from the three cuts projected in December. This hawkish tilt was widely expected but still weighed on risk sentiment.
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Fed Chair Jerome Powell, in his press conference, emphasized that the committee is in no hurry to ease policy. “We need to see more progress on inflation before we consider adjusting the policy rate,” Powell said. “The data are not giving us that confidence yet.” The statement removed previous language about “progress” on inflation, a subtle but notable shift that markets interpreted as a signal of extended patience.
Warsh’s Silence Speaks Volumes on Tariffs
While the Fed decision was the headline event, the market’s real focus quickly shifted to Kevin Warsh, the former Fed governor now serving as a senior economic advisor. In a brief appearance before reporters, Warsh was asked directly about the timeline and scope of new tariff measures targeting Japanese auto imports. He declined to answer, stating only that “trade policy remains under active review” and that he would not “pre-empt any announcements.”
Also read: Hawkish Fed Hold Could Bolster the US Dollar, MUFG Analysts Say
The non-answer left currency traders in a state of heightened uncertainty. The yen, which has been under persistent selling pressure due to the wide US-Japan interest rate differential, suddenly found a bid. The lack of clarity on tariffs raised the possibility that the administration might hold back on aggressive trade measures, at least temporarily, reducing the risk of a disruptive trade war that would further complicate the Fed’s inflation outlook.
Yen Relief: Temporary or Trend Change?
The yen’s rally on Wednesday was notable but likely short-lived. USD/JPY dropped from around 149.80 to a low of 148.90 before settling near 149.20. The move was driven by a combination of profit-taking on long-dollar positions and a reassessment of the rate differential outlook. However, the fundamental drivers remain unchanged: the US 10-year yield is still above 4.5%, while Japan’s 10-year yield is below 1.5%, a gap that continues to favor the dollar.
Analysts at Reuters noted that the yen’s gain was more about positioning than a shift in fundamentals. “The market was very long dollars heading into the Fed, and Warsh’s non-answer gave traders an excuse to take some chips off the table,” said one Tokyo-based strategist. “But unless we see a concrete change in either Fed policy or the Bank of Japan’s stance, the yen’s weakness is likely to resume.”
What to Watch Next
For forex traders, the next key catalyst will be the US Personal Consumption Expenditures (PCE) price index release on Friday. A hotter-than-expected reading would reinforce the Fed’s cautious stance and likely push USD/JPY back above 150. Conversely, a softer print could extend the yen’s relief. Meanwhile, any clarity on tariffs from the administration would be the single most impactful variable for the yen’s trajectory. Until then, the yen’s cover remains thin and temporary.
