CICC Research The Federal Reserve held interest rates steady at its January meeting, aligning with market expectations. Governor Waller cast a dissenting vote, which may be related to his aspirations to be nominated as the next Fed Chair. The monetary policy statement noted that "the unemployment rate has stabilized," and Chair Powell indicated that monetary policy is "in a good place," suggesting a higher bar for another rate cut in the near term. Beyond this, Powell offered little additional guidance and sidestepped other questions unrelated to interest rate decisions. We maintain the view that the Fed is still likely to cut rates twice in 2026, but the timing of the first cut may be pushed back to the second quarter. The core issue for the U.S. economy is not insufficient growth, but rather imbalances in income distribution and affordability pressures on ordinary households. Such structural problems cannot be resolved by monetary policy alone; on the contrary, they may prompt the government to adopt more non-market, interventionist policies to address voter concerns.
The Fed held rates steady, while Governor Waller advocated for a cut. The FOMC meeting maintained the current interest rate, with the policy statement indicating that "job gains have moderated, and the unemployment rate has shown signs of stabilizing. Inflation remains elevated"[1]. Over the past year, the labor market has cooled significantly, but the unemployment rate dipped to 4.4% in December from 4.5% the previous month, somewhat alleviating the Fed's concerns about a further deterioration in employment. Meanwhile, while there are signs of inflation moderating, it remains well above the Fed's 2% target. Against this backdrop, policymakers chose to remain on hold for the time being. However, the decision was not unanimous. Two officials—Fed Governors Milan and Waller—voted against the decision, advocating for a 25-basis-point rate cut. Milan, nominated by Trump last September, has consistently held a more dovish policy stance. Waller is viewed by markets as a potential candidate for the next Fed Chair; to bolster his chances for nomination, he also has an incentive to lean towards pushing for further rate cuts. Following the decision, market expectations for Waller receiving the Chair nomination warmed, with his perceived probability of nomination rising from 8% to 17%[2]. Powell stated that monetary policy is "in a good place"[3]. During the press conference, Powell provided little guidance on future policy rates, maintaining a relatively low-key and reserved stance. He merely indicated that the current level of interest rates is appropriate and is near the upper end of the neutral rate range, consistent with his remarks from December of last year. Powell expressed no concern over the slowdown in job growth witnessed since last year, instead attributing it to decreased labor supply stemming from tighter immigration policies. On the economy, he believed the growth outlook had improved compared to the previous meeting, which would positively impact labor demand and employment. Regarding inflation, he suggested the impact of tariffs was primarily seen in rising goods inflation, an effect that might peak around mid-year, while services inflation is gradually declining. Powell avoided other questions unrelated to monetary policy, including the recent investigation launched by the Department of Justice. Powell did not dwell on the judicial probe, indicating his desire to avoid reigniting conflict with Trump on this issue before his term ends. When asked if he would remain on the Fed's Board of Governors after his term as Chair concludes in May, he stated he had not yet decided and declined to specify when a decision would be made. Should Powell choose to stay, Trump would lose an opportunity to appoint another governor, and the Fed's policy decisions would likely depend more on data than on administrative intervention. The Fed still has room to cut rates, but the timing may be pushed back. We believe Powell's attitude towards the economy and employment is more optimistic than at the previous meeting, giving him greater confidence to hold rates steady. Concurrently, robust economic data also leaves the Fed with little need to take any insurance measures in the short term. Additionally, it's important to note that 2026 brings a rotation of four regional Fed presidents into FOMC voting seats, three of whom currently hold cautious views: Cleveland Fed President Hammad and Dallas Fed President Logan have repeatedly emphasized the risks of persistent high inflation, while Minneapolis Fed President Kashkari explicitly opposed a rate cut at this meeting. Only Philadelphia Fed President Paulson expressed greater concern about the labor market. The Fed is still expected to cut rates twice in 2026, but the first cut might be delayed until the second quarter. We lean towards the view that the labor market is unlikely to see substantial improvement, especially as AI adoption accelerates, incentivizing businesses to replace labor with technology for cost efficiency. However, given that inflation is not fundamentally resolved and market concerns about Fed independence are intensifying, officials will also be more cautious about cutting rates again. More broadly, while U.S. economic growth appears resilient on the surface, the benefits are more concentrated among high-income groups, with middle- and low-income households still facing varying degrees of "affordability pressure." The recently released January Conference Board Consumer Confidence Index hit its lowest level since 2014, indicating widespread household anxiety about the economic outlook. The core economic problem is not a lack of growth, but unbalanced income distribution. Such structural issues cannot be solved by monetary policy alone; against the backdrop of the midterm elections, they may instead push the government towards more non-market, interventionist policies to respond to voter concerns.
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