The Federal Reserve is scheduled to convene its Federal Open Market Committee (FOMC) meeting on Tuesday Eastern Time, with markets widely anticipating a pause in the central bank's rate-cutting cycle. As the labor market stabilizes, the deep internal divisions that have festered for months are showing signs of healing, allowing the Fed's policymakers to regain a degree of consensus. Multiple officials, including some with close ties to the Chair, have signaled that after three consecutive rate cuts, the current interest rate level is now appropriate—sufficient to support employment while maintaining downward pressure on inflation. "Essentially, they are now largely within the 'sweet spot' of neutral estimates," said Josh Hilt, Senior U.S. Economist at Vanguard. "This fosters greater caution and reduces the urgency for further cuts."
This meeting offers Fed Chair Jerome Powell an opportunity to shift public attention away from the political and legal maelstrom surrounding the institution and back onto its core mandates of controlling inflation and maximizing employment. However, any respite is likely to be brief. The anticipated decision to hold rates steady will almost certainly fuel the anger of Donald Trump, who has advocated for sharp rate reductions. The FOMC statement is scheduled for release at 2 p.m. ET on Wednesday, followed by a press conference with Powell at 2:30 p.m. His remarks will be scrutinized for any clues about how long the Fed intends to stand pat, what factors might tip the scales back in favor of rate cuts, and whether Powell has an alternative strategy in his struggle with Trump.
On the economic front, recent data trends have helped ease the tensions that caused deep rifts within the FOMC in recent months. A sharp slowdown in hiring had alarmed officials worried the labor market was nearing a breaking point. Meanwhile, another faction remained vigilant about inflation and voiced stronger opposition after each rate cut. By December, Powell was facing what amounted to a near "revolt," with as many as eight regional Fed presidents dissenting. This divergence was amplified by a lack of data due to a government shutdown.
Recent data has slightly cooled this debate. Core consumer price inflation for the year through December came in at 2.6%, lower than expected, calming the nerves of policy hawks. On the employment front, the unemployment rate has edged down after hitting a four-year high of 4.5% in November. Other labor market indicators are also reassuring, showing no signs of a wave of layoffs, even though hiring activity remains soft. "Overall, the situation is not urgent enough to warrant any policy action from the Fed," said Yelena Shulyatyeva, Senior U.S. Economist at The Conference Board. While she remains more concerned about employment than inflation, she now views the labor market as being in a "fragile balance," with job growth concentrated in just a few sectors.
Investors in the $30 trillion U.S. Treasury market have prepared for rates to remain higher for longer. Swap contracts now price in the first rate cut for July, with possibly one more before the end of the year. Wall Street analysts have pushed back their expectations for 2026 rate cuts to the second half of the year, while JPMorgan has abandoned its forecast for cuts this year entirely. "There really isn't a compelling argument right now for the Fed to do anything substantial," said Gregory Faranello, Head of U.S. Rates Trading and Strategy at AmeriVet Securities. "They are on hold for the near term."
Not all policymakers have settled down. Fed Governor Stephen Milan, currently on unpaid leave to serve as a senior advisor to Trump, has called for 150 basis points of rate cuts this year. Vice Chair for Supervision Michelle Bowman has stated that officials should avoid signaling that the central bank will pause its easing cycle. However, these two appear relatively isolated. Other policymakers who have spoken since the December meeting, including New York Fed President John Williams, whose views are considered highly aligned with Powell's, have sounded comfortable maintaining the current rate stance.
Beyond the post-meeting press conference, Powell has not publicly commented on policy views since October 14th. Even Fed Governor Christopher Waller, an early advocate for rate cuts as far back as last June, has moderated his tone. "Because inflation is still elevated, we can take our time," he said on December 17th, a week after the last meeting.
Despite the near-harmony internally, external pressures remain immense. Powell's post-meeting press conference will be his first public appearance before reporters since receiving a grand jury subpoena related to a Justice Department investigation. The probe is examining the Fed's ongoing office renovation project and Powell's congressional testimony about the project last year. This move has angered several Republican lawmakers and infuriated Powell himself, who lambasted the subpoena as a direct threat to the Fed's ability to set interest rates independently, free from "political pressure or intimidation."
His forceful response has sparked speculation that Powell may choose to remain on the Fed's Board of Governors after his term as Chair ends in May. Doing so would deny Trump an opportunity to appoint another member to the Board and could potentially weaken the next Chair's ability to influence interest rates. Powell will undoubtedly face questions about his intentions post-May, the Justice Department investigation, and his appearance last week at a Supreme Court hearing regarding the government's attempt to fire Governor Lisa Cook.
Darrick Hamilton, an economist at The New School, views the political storm around the Fed as a sign of "extraordinary times" that could make the outcome of rate-setting meetings harder to predict. "I don't think it will cause sitting members to change the direction of decisions they would have otherwise made," he said. Nonetheless, "the pressure is there, and I suspect it will have an effect."
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