Market expectations for Federal Reserve interest rate cuts have cooled significantly recently due to resilient labor market data and persistent inflation, and the collective hawkish stance conveyed in the latest remarks from Fed officials has further dampened these expectations. Philip Jefferson, the Fed Vice Chair whose monetary policy stance has long been moderately hawkish, stated that the benchmark interest rate is very close to a level that neither stimulates nor slows the economy. This implies that, in Vice Chair Jefferson's view, there is no urgency for rate cuts in 2026, and he emphasized that this places Fed officials in a favorable position to respond to evolving economic risks. This comes as the "rate cut trade" theme has already begun to show clear signs of weakness, coinciding with multiple Fed officials expressing hawkish stances on 2026 monetary policy. Since the release of various labor market statistics in December, coupled with the latest November PPI and December CPI data showing a slow pace of disinflation in the US, and better-than-expected growth in the latest US retail sales data, interest rate futures traders have continued to scale back their expectations for Fed rate cuts in 2026. The "CME FedWatch Tool" indicates that traders in the interest rate futures market have now reduced their bets for 2026 Fed rate cuts from the expectation of three cuts priced in at the end of 2025 down to two cuts. Furthermore, traders are broadly betting that the first rate cut in 2026 will occur in June, rather than the previously anticipated March. However, the rate cut expectations indicated by the "CME FedWatch Tool" still exceed the median forecast of Fed officials shown in the FOMC dot plot, which projects only one rate cut for 2026. Jefferson, in remarks prepared for an event in Boca Raton, Florida on Friday, stated, "In my view, the current stance of monetary policy will allow us to determine whether and when further adjustments to our policy rate are appropriate, based on incoming data, the evolving outlook, and the balance of risks." Jefferson has joined a growing cohort of hawkish Fed officials who, following three rate cuts completed in late 2025, are declaring that the Fed's current benchmark interest rate setting is well-suited to balancing the risks between non-farm payrolls and inflation. Only two policymakers—Fed Vice Chair for Supervision Michelle Bowman and Trump-appointed Fed Governor Stephen Milan—have stated that the Fed should not have paused the rate-cutting process this month. Jefferson noted that recent pricing data for services and housing costs indicate that inflation is moving towards the Fed's long-term target of 2%. Although goods price inflation has risen, Jefferson suggested it is reasonable to expect that the price effects from tariffs will not persist for an extended period. The Fed Vice Chair also expressed that, despite increased downside risks to the overall US labor market, he expects the unemployment rate to remain stable in 2026. In his latest remarks, Jefferson also addressed the resumption of Fed asset purchases and the management tools for the Fed's $6.6 trillion balance sheet. He emphasized that the new asset purchase program is designed to stabilize bank reserve levels and should not be interpreted by the market as an attempt to provide stimulus to the economy. When speaking with reporters after his speech, Jefferson briefly responded to the significant controversy surrounding the US Department of Justice issuing a criminal investigation subpoena to the Fed Chair, related to statements made by Fed Chair Jerome Powell during Congressional testimony in June of last year about an ongoing renovation project at the Fed headquarters. Powell issued a rare statement on Sunday evening, indicating that this action stems from the Trump administration's opposition to the Fed's monetary policy decisions. "I have great respect for Fed Chair Powell," Jefferson told reporters during a break in the conference. "I believe he is a person of immense integrity and great character." Concerns among global investors about the independence of the Fed's monetary policy have intensified this week, with central bank governors worldwide voicing support for Fed Chair Powell after the Trump administration threatened criminal prosecution against him. It is undeniable that the Fed's decades-long monetary policy independence is facing an "unprecedented political offensive." Fed Chair Jerome Powell stated that the US Department of Justice has served the Fed with a grand jury subpoena, threatening criminal prosecution over content he mentioned during his testimony before the US Congress in June 2025 regarding the ongoing renovation of the Fed headquarters. In a statement released on Sunday evening US Eastern Time, Powell denied that this action was related to his testimony or the renovation project. "All of this is a pretext," Powell said in the statement posted on the Fed's official website. "The threat of criminal charges is because the Fed sets the benchmark interest rate based on our professional judgment of what best serves the American public, not by following the preferences of the US President." Powell added in the statement, "This is about whether the Fed can continue to set interest rates based on real data evidence and economic conditions—or whether monetary policy in the future will be determined by political pressure or coercion."
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