The Federal Open Market Committee will keep rates in a range between 4.25% and 4.50% at its January meeting, analysts agree, with political developments and economic data determining future moves.
“There are a lot of moving parts here with the potential to either help or hinder the Fed’s quest for price stability and maximum employment” this year, noted BMO Deputy Chief Economist Michael Gregory, who says the Fed will “stand pat” at this meeting.
While a March rate cut remains possible, “most traders expect a more extended pause until the middle of the year,” said Matt Weller. global head of research at StoneX.
Since the Summary of Economic Projections won’t be updated at this meeting, he said, Fed Chair Jerome Powell will have “near-complete control over how the Fed’s near-term expectations are conveyed.”
Weller believes the chair will “try to minimize market disruption by emphasizing a data-dependent approach to interest rates.”
Should inflation and employment data show the resiliency they have recently, Weller said, “there’s an argument for the Fed to leave interest rates unchanged throughout the entire year, if not outright start raising them again.”
In the statement, Weller said he will “watch for any comments on the Fed’s independence and political meddling.”
President Trump said last week
While no change in rates is expected at this meeting, DWS Chief U.S. Economist Christian Scherrmann noted, “current data may suggest a less hawkish stance than in December.”
The latest inflation data suggest “further, but limited, rate cuts” remain possible, he said.
“What remains, however, is policy uncertainty,” Scherrmann said. “While central bankers now have some input from the new administration, it remains unclear how tariffs will be used, not to mention how fiscal policy will be shaped.”
Immigration, which aided the economy, will “decline significantly going forward,” with economic consequences “difficult to assess, and it remains uncertain whether potential disinflationary trends from lower growth can offset potential price pressures from tighter labor markets due to reduced labor supply,” he said.
How the administration
Scherrmann expects “a hybrid outcome in which they are first a foreign policy tool and later, as trade deals are finalized, may contribute somewhat to government revenues. This implies a narrative of fewer tariffs and a more gradual phase-in, which could support expectations of a less significant impact on inflation.”
Despite the questions, DWS expects a cut in March and maybe June. “Needless to say, the risks are tilted to the upside at the moment,” he added.
Morgan Stanley Research sees the Fed holding rates, “but retain[ing] its easing bias.”
In the press conference, “Powell is likely to sound confident on disinflation given recent inflation outturns, keeping a March rate cut on the table,” they said.
A “narrow” path to rate cuts in March and June remains if tariffs are phased in this year, they said.
“We expect a meaningful discussion about balance sheet runoff and the end to quantitative tightening,” they added. “We think QT ends in March, with risk to June or September.”
Tracey Manzi, senior investment strategist at Raymond James, said with the pause likely, Powell’s press conference will be the highlight.
“Attention will be focused on Powell’s press conference for any insights on the Fed’s future rate path,” she said. “We’ll be watching for any dovish signals from Powell, especially given last week’s better than expected core CPI print.”
And since the Fed clearly signaled it is in no rush to cut rates more, “particularly as the economy remains in good shape,” Manzi said, “we believe the Fed will have scope to continue its easing cycle later this year as growth moderates and the disinflationary trend continues.”
Raymond James’ base case is two 25 bps cuts this year.
“Powell has the luxury of a little bit of time to observe events under President Trump’s new administration and to see exactly what happens,” the BNP Paribas Markets 360 team said.
With no change in rates this meeting, they said, “Powell will probably keep his options somewhat open for March, we anticipate an indication that the most likely path for the next few FOMC meetings is a continued hold.”
The rate cuts were likely an attempt “to avoid recessionary dynamics,” they said, based on expectations of a weakening labor market and restrictive rates.
In the press conference, they said, “we think Powell will try to keep his answers short on this topic.”
With an eye on the Trump administration’s potential inflationary policies, the Fed will hold rates, said Jay Hatfield, CEO and CIO of Infrastructure Capital Advisors. “We, however, strongly disagree with the Fed’s view as tariffs are deflationary in the long run due to a stronger dollar offsetting the tariff increases and revenue from the tariffs reducing the deficit and increasing capital available for investment.”
He doesn’t see “deporting criminals” as inflationary, “as there is a developing surplus of low wage workers due to minimum wage hikes and associated automation.”
Inflation should slow and growth decelerate enough for three or four rate cuts in 2025, Hatfield said. “We do not expect the Fed to signal these cuts at this month’s meeting as this Fed has no demonstrated ability to accurately forecast inflation or the economy.”
In addition to the recent CPI, “a lack of ‘day one’ tariffs’ from the Trump administration has also helped cool the inflation narrative,” noted Thomas Urano, co-CIO at Sage Advisory. “Investors will be on the hypersensitive to clues that the Fed is emphasizing inflation risk as the center stage concern.”
“The truth is the Fed hasn’t finished the job on inflation because they started cutting too early,” University of Central Florida Economist Sean Snaith said.
The Fed shouldn’t cut rates for most, if not all, this year, he said.