The Federal Reserve's interest rate decision will be officially announced at 3:00 AM Beijing Time on Thursday, followed 30 minutes later by a press conference from Chairman Jerome Powell. This week, Powell is expected to steer market focus toward economic fundamentals—the broad market consensus anticipates the Fed will hold rates steady this week, maintaining the current level after three consecutive 25-basis-point cuts. However, this press conference carries unique significance; it marks Powell's first public appearance since the Fed received a grand jury subpoena and comes just days after the Supreme Court debated the controversial removal of another Fed governor. He will inevitably face pointed questions on political interference, defending central bank independence, and his personal plans after his term as Chair expires in May. Following a series of controversial rate cuts, the decision to hold rates steady this month may garner broad support among policymakers. While a majority of officials had previously acknowledged the necessity of cutting rates to support a weakening labor market, another faction has consistently emphasized prioritizing the fight against persistently high inflation. "This feels a bit like a 'Kumbaya moment,'" said Tim Duy, Chief Economist at SGH Macro Advisors. "Policymakers seem to be reaching a consensus that 'that contentious cutting cycle is over, and we can pause here. If the economic data changes later, we can reassess the need to restart easing.'" The central bank has signaled that rates have reached an "appropriate level." Since September 2024, officials have lowered the benchmark rate by 1.75 percentage points, placing it in the 3.5% to 3.75% range. Several policymakers have stated this positions them favorably to balance risks to employment and inflation. The labor market has cooled noticeably over the past year, but the unemployment rate fell to 4.4% in December from 4.5% the previous month, indicating a stabilizing employment situation. Inflation has also shown signs of moderating, yet it remains well above the central bank's 2% target. Karim Basta, Chief Economist at III Capital Management, stated that Powell will likely convey that rates are "at an appropriate level for now," as officials await clarity on how forthcoming fiscal stimulus and evolving tariff policies will impact prices and employment. Basta added he is keen to see if Powell expresses concern over the near-zero job growth or interprets it as consistent with reduced immigration. Fed watchers expect minimal changes to the central bank's post-meeting statement. Basta noted that policymakers might adjust the description of the labor market to reflect the recent drop in unemployment. Duy suggested they could also reference the stronger-than-expected economic growth in the second half of last year. Bloomberg Economists Anna Wong and Chris G. Collins argued, "While the FOMC is widely expected to hold rates steady at the January meeting, it could still be highly significant. A decision to pause the easing cycle would provoke strong discontent from the White House, which has already exerted significant pressure on Fed Chairman Jerome Powell." Holding rates steady this month will still encounter some opposition. Fed Governor Stephen Miran, who dissented at the last three meetings advocating for larger cuts, may express this view again this week. Michelle Bowman, who stated earlier this month that the Fed should be prepared to cut rates further, may also dissent. However, some officials who previously supported cuts may now be satisfied with a pause. Most notably, Governor Christopher Waller, the first policymaker to publicly favor cuts back in June, has recently stated that with inflation still above target, "there is no hurry to cut rates." This meeting will see four regional Fed bank presidents rotate into voting seats on the FOMC: Cleveland Fed President Beth Hammack and Dallas Fed President Lorie Logan, who have been vocal about high inflation risks; new Philadelphia Fed President Anna Paulson, who has indicated she remains more concerned about the labor market; and Minneapolis Fed President Neel Kashkari, who stated earlier this month that rates should remain unchanged at this meeting. Officials will not release new economic projections this week, so investors will scrutinize Powell's remarks for clues on how long policymakers expect rates to remain stable. The median forecast released in December indicated officials anticipate only a 0.25 percentage point cut this year. Powell will certainly face questions regarding threats to the Fed's independence. This press conference will be his first public comments since his strong statement earlier this month, where he indicated the Justice Department's subpoena to the Fed was an attempt to influence monetary policy through intimidation. News of the subpoena has fueled speculation that Powell might remain on the Fed Board after his term as Chair ends in May, as his Governor term lasts until 2028. Although he will almost certainly be asked about his plans again, Powell has consistently refused to answer in the past.
Comments