New leadership appointments, the tug-of-war between economic growth drivers and downward pressures, and the persistent disturbances from external political interference have made every move by this core global central bank a focal point for sensitive market nerves. The upcoming January FOMC meeting is poised to become the first key window for observing the policy direction for the year.
Looking back at 2025: A year of constant political turmoil left the Federal Reserve deeply mired in instability. The year proved to be exceptionally eventful for the Fed: Following the commencement of his second term, former President Donald Trump repeatedly threatened to fire Chair Jerome Powell, expressing dissatisfaction with the slow pace of interest rate cuts. Mid-year, the Fed was embroiled in a public controversy over the spiraling costs of the Washington headquarters renovation project. Concurrently, attempts were made to oust Fed Governor Lisa Cook using unsubstantiated "mortgage fraud" allegations—a dispute that remains unresolved, with the Supreme Court scheduled to hear arguments on January 21 to determine whether Trump possesses the legal authority to dismiss Cook.
Meanwhile, Powell's term as Chair is set to expire in May, and the behind-the-scenes competition for his successor is already intensifying. Treasury Secretary Scott Bessent is leading the selection process, which initially saw a candidate list of 11 individuals. Powell himself has yet to clarify whether he will serve out his full term as a Board Governor, which expires in January 2028.
The broad market consensus is that, following the severe turbulence of 2025, the Federal Reserve will remain squarely in the spotlight and at the center of controversy throughout 2026. Kathy Bostjancic, Chief Economist at Nationwide, stated plainly, "The high level of uncertainty hanging over the Fed currently leaves it facing challenges from all sides."
As the first critical event of 2026, the interest rate decision from the FOMC meeting on January 27-28 is drawing significant attention. Data from Polymarket indicates a 90% market probability that the Fed will hold rates steady, with only a 10% chance of a 25-basis-point cut.
This expectation is partly influenced by the stances of newly appointed voting committee members.
Cleveland Fed President Beth Hammack and Dallas Fed President Lorie Logan both hold hawkish views, favoring maintaining stable rates. Minneapolis Fed President Neel Kashkari has also recently shifted to a more hawkish stance, explicitly stating that the bar for further rate cuts is high. Only Philadelphia Fed's new President, Anna Paulson, strikes a more dovish tone, supporting modest rate cuts later in the year and focusing more on labor market performance than inflation data.
Furthermore, the new Fed Chair scheduled to take office in May is widely perceived by markets as potentially bringing a more dovish policy bias, setting the stage for subsequent policy adjustments.
Divergences in policy outlook are becoming increasingly apparent both among institutions and within the Fed itself. Following three consecutive rate cuts, coupled with market expectations for economic stabilization and persistent inflationary pressures, the general external forecast is for a significantly slower pace of Fed rate cuts in 2026, with limited room for further easing.
Most Wall Street institutions believe the Fed will temporarily ignore external noise and continue along a path of gradual, small rate cuts until the benchmark rate approaches a neutral level around 3%—the current federal funds rate is only 0.5 percentage points above the long-run neutral rate estimated by most FOMC members.
Predictions for the exact number of cuts vary: Bostjancic anticipates two cuts for the year, likely around mid-year and year-end; the Fed's own "dot plot" suggests only one cut.
Conversely, Moody's Analytics Chief Economist Mark Zandi and institutions like Citigroup, citing signals of labor market weakness, project the possibility of three rate cuts within the year. Apollo Global Management Chief Economist Torsten Slok holds the opposing view, arguing that the resilience of the U.S. economy will constrain the scope for cuts, resulting in just one reduction for the full year.
It is noteworthy that Powell and his colleagues have repeatedly emphasized that they will not be pressured into hasty rate cuts by external forces, asserting that economic data will be the sole criterion for policy adjustments.
Additionally, recent policy meetings have seen several instances of dissenting votes among members. The newly appointed regional Fed bank presidents joining the FOMC tend to lean hawkish, which is expected to create further headwinds against additional rate cuts.
Economic fundamentals and the potential impact of artificial intelligence are introducing significant variables into the Fed's policy calculus.
The effects of the three precautionary rate cuts implemented by the Fed at the end of 2025 are expected to gradually materialize throughout 2026. Combined with factors like post-government shutdown recovery and consumer tax refunds, economic growth is anticipated to rebound in the first quarter. Against this backdrop, markets generally expect the Fed to maintain stable rates in the first half of the year, continuously monitoring economic data and the transmission effects of previous policy actions.
Artificial intelligence, as a critical variable, is emerging as a new challenge for the Fed: it represents a lever for significant productivity gains but also poses a potential threat to the labor market. Massive capital inflows into cutting-edge technology sectors, coupled with explosive gains in related concept stocks, have been a core driver behind Wall Street indices achieving double-digit percentage gains.
Joseph Brusuelas, Chief Economist at RSM US LLP, pointed out, "This year, the Fed must clearly communicate its core assessment of the AI trend to the markets, providing a clear strategic anchor for monetary policy during this period of economic transformation."
The macroeconomy is accelerating its transition towards integrating advanced technologies across the entire production and service chain, a shift that could very well become a critical watershed moment for a change in Fed policy direction.
In 2026, the Federal Reserve must simultaneously defend the independence of monetary policy amidst political maneuvering, carefully calibrate policy amidst the balancing act of economic recovery and inflationary pressures, and contend with macro-level variables introduced by new technologies like AI.
The interest rate decision from the January FOMC meeting and the finalization of the new Chair appointment will serve as crucial keys to unlocking the policy direction for the entire year. The markets will respond in real-time to this central bank balancing act through successive waves of volatility.
It is also important to note that while the surface-level probability of a January Fed rate cut appears low, and the dot plot suggests the cutting cycle is nearing its end, more optimistic market expectations for future cuts persist. These are fueled by concerns over AI's potential impact on U.S. employment and the possibility of political intervention from the Trump administration. This optimism has, in turn, contributed to strong performances in precious metals while simultaneously capping the U.S. dollar's recovery potential.
Moving forward, it will be essential to continue tracking U.S. economic data and the White House's stance towards the Federal Reserve to validate the above assumptions. Any developments that contradict these assumptions could easily create expectation gaps and influence market trends.
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