- Legal attack on Fed contributes to closing the door for more proactive easing
- We expect the FOMC to keep policy rates unchanged in the upcoming meeting for both economic and institutional reasons
- This would leave the federal funds target range at 3.50–3.75%, in line with market pricing and consensus forecasts.
- Support for the decision is expected to be broad-based and backed by all voting members, with the exception of dovish outlier Governor Stephen Miran.
- With no updated Summary of Economic Projections (SEP) or dot plot, attention will centre on the extent of Chair Powell’s pushback against recent executive challenges into the Federal Reserve’s autonomy.
 Michael Krautzberger |
No economic urgency to continue easing in January
Following the hawkish rate cut in December and a cumulative easing by 75 basis points over the last three meetings, the FOMC is expected to adopt a wait-and-see stance. Recent macro data, including stronger than expected Q3 GDP growth and a decline in the unemployment rate in December, point to an ongoing robust economic environment. While core CPI inflation moderated in the final quarter of last year, core PCE inflation, the Fed’s preferred price gauge, was still running at an elevated 2.8% year-over-year in November. Government shutdown-related distortions of these numbers still blur the view on the underlying inflation trajectory.
Policymakers became more upbeat on the medium-term economic outlook in December’s SEP. Significant upward revisions to median GDP growth projections, alongside modest downward revisions to unemployment and inflation, reflected growing confidence in an AI and productivity-driven Goldilocks scenario. Even in this more optimistic environment, the median policy-rate path conveyed by the dot plot continued to imply 25 basis point cuts in both 2026 and 2027 amid a wide dispersion of views.
Despite lingering downside risks to the labour market, the combination of solid macro data, policymakers’ fundamental optimism, and still above-target inflation supports a January pause. With the FOMC seeing its policy stance “within a range of plausible estimates of neutral” and broader financial conditions already growth-supportive, Chair Powell will likely abstain from signalling further near-term rate cuts while leaving open the option for some more easing, if the Fed’s sanguine macro scenario materialises.
Full-blown attack on Fed autonomy closes the door for more proactive easing
The administration escalated tensions with the Fed to legal confrontation after the Department of Justice (DOJ) subpoenaed the Fed, raising the risk of a criminal indictment related to Chair Powell’s Senate testimony last June over the headquarters renovation project. As this escalation poses additional risks to the central bank’s independence and credibility, policymakers could close the ranks and project unity, while becoming less inclined to continue cutting rates absent visible economic weakness. Uncertainties around the nomination of the new Fed Chair and the pending dismissal of Governor Cook add to this.
Monetary policy implications for financial markets may increasingly be dominated by politics rather than economics
Even as the Fed’s shift from an already conducive ‘insurance cut cycle’ to a more favourable Goldilocks narrative continues to provide a constructive fundamental environment for financial markets, it remains overshadowed by ongoing politicisation of monetary policy in the months ahead. In the near term, comments by Powell on this topic during the press conference may be more market-moving than the rate decision itself, particularly any indication that he intends to remain on the Board as a Governor until 2028, even after the end of his Chairmanship in May. An expected on-hold decision is unlikely to trigger meaningful market responses on its own. In our base case of reasonable growth and more persistent inflation than expected by consensus and the Federal Reserve, we continue to expect a final rate cut for the cycle in the second quarter, to a terminal rate slightly higher than currently priced by the money market.
