This week’s Federal Reserve gathering provides minimal drama and likely not much response, amid substantial shifts anticipated for the central bank’s long-term path.
Based on market predictions and officials’ remarks, there is virtually no probability that the Fed will modify its primary interest rate when the meeting concludes Wednesday.
Despite a recent series of disagreements among Federal Open Market Committee members regarding the future course of monetary policy, the immediate approach is likely to remain one of caution as last year’s rate cuts permeate the economy.
“In general, the Fed prefers to remain steady. They believe they have the luxury to wait and observe,” former Fed Vice Chair Roger Ferguson stated in a CNBC interview on Monday. “This seems like a wait-and-see session, and we should all be attentive to any indications or leanings towards future actions.”
Clues regarding the FOMC’s direction will emerge from the post-meeting policy statement as well as Chair Jerome Powell‘s subsequent news briefing. Currently, markets predict that the Fed will execute one or two cuts this year — most likely in June and December, based on futures market analysis reflected by the CME Group’s FedWatch tool.
However, the attention will undoubtedly extend beyond the interest rate decision and future predictions, diving into an unprecedented atmosphere of intrigue that surrounds the meeting.
Storm surrounding Powell
For instance, President Donald Trump asserted to CNBC last week that he may have pinpointed his search for Powell’s replacement to one singular candidate, a nomination that could be revealed this week and perhaps even aligned with the Fed’s rate decision.
“If there is a most probable scenario, it’s during the January FOMC — especially if Trump wishes
to redirect focus away from a Fed that did not lower rates,” Stephanie Roth, chief economist at Wolfe Research, noted in a statement. “More generally, the announcement could occur as early as this week, or within the next weeks.”
Also unfolding in the background: The Justice Department has issued a subpoena to Powell requesting information regarding the Fed’s extensive renovation project at its Washington, D.C., headquarters. In an unusually forthright videotaped declaration, Powell regarded the investigation as a “pretext” for Trump’s aim to intimidate the Fed into more aggressive rate cuts than it has enacted recently.
Uncertainties exist elsewhere as well, including Trump’s attempt to remove Fed Governor Lisa Cook over allegations related to mortgage fraud last week before the U.S. Supreme Court, and the impending expiration of Trump appointee Stephen Miran’s term on Saturday. Fed governors can remain in position until they are succeeded, so it’s unclear how much longer Miran will continue on the board. He opposed each of last year’s three quarter-point rate reductions, advocating for even larger adjustments.
Therefore, while the market will closely monitor industry rate updates and insights, a significant portion of the focus will be directed at the accompanying events that have unsettled the central bank.
Political influences
“Although the Fed has faced political pressure to lower rates, it is not swayed by the data,” remarked Gregory Daco, chief economist at EY-Parthenon. Nevertheless, Powell “is expected to avoid making direct comments regarding the Department of Justice investigation involving himself and the Fed, as well as the Supreme Court’s pending decision concerning Governor Cook.”
That won’t prevent reporters from inquiring, however.
“Powell will be questioned about his video cautioning that Trump DoJ subpoenas and other measures aim
to subject monetary policy to the ‘preferences of the president,'” stated Krishna Guha, head of global policy and central bank strategy at Evercore ISI, in a note. “We believe he will adhere to all he stated and express confidence in the Supreme Court as the ultimate arbiter of Fed independence.”
In the absence of further political developments, this will redirect the attention back to policy.
Markets will seek to interpret whether the pause this month is hawkish, signaling an extended hiatus from cuts, or dovish, implying that Powell and the committee foresee more cuts ahead, just not at this moment.
Morgan Stanley’s chief economist, Michael Gapen, anticipates a leaning towards dovish.
“We believe the recent stabilization in the labor market and strong activity data will be the primary factors behind the decision to pause rate cuts, while incoming data on inflation will keep the Fed sufficiently confident about disinflation later this year to maintain an easing bias,” Gapen noted. “We do not think committee members are prepared to indicate an end to the rate-cutting cycle.”
Gapen is also forecasting several adjustments in the post-meeting statement, likely reflecting an upgrade to economic growth and a removal of language regarding increased downsides to employment.
