
US Interest Rate Prep
On Wednesday 29th of January at 14:00 ET, the FOMC is set to release the results of their latest monetary policy meeting.
Here are some views on what to expect.
General Expectations
Markets and median analyst expectations expect the FOMC to keep rates unchanged at 4.5%.
In the unlikely event that rates are cut, we would expect a large amount of strength in US stocks, and weakness in the dollar and government bond yields, as pricing in for the expected rate cut is undone and reversed.
But If the hold is realized, attention will turn to the rate statement.
If the rate statement is more hawkish (underlines uncertainty about the strength of the jobs market and inflation return to target), this could indicate to the markets that the pace of rate cuts may slow down, which would be likely to cause weakness in US stocks, and strength in the dollar.
If the rate statement is more dovish (underlines increased confidence in inflation return to target, and satisfaction in the strength of the jobs market) this could confirm that the Fed can go ahead with further rate cuts, which would be likely to strengthen US stocks and weaken the dollar and government bond yields.
Commentary
Wells Fargo
The FOMC has cut rates at each of its past three meetings since September, amounting to a cumulative reduction of 100 bps. The upper bound of the target range now sits at 4.50%; however, a pause in the easing cycle seems likely at next week’s meeting and is widely expected by market participants. Economic growth has been strong entering 2025, and inflation has proved to be less cooperative than the FOMC would like. Comments from many policymakers at the Fed have highlighted the risks to further policy accommodation with PCE inflation still sitting at 2.4% year-over-year and core PCE inflation running at 2.8%. While the risks to the inflation side of the Fed’s dual mandate have remained apparent, the risks to the employment mandate have subsided somewhat compared to a few months ago. The unemployment rate dropped a tenth to 4.1% in December, and nonfarm payroll growth has now been north of 200K in each of the past two months.
Looking forward, we expect the Fed to remain on hold for the first half of the year. We then look for two cuts of 25 bps each during the September and December meetings, with the FOMC holding its target range at 3.75%–4.00% throughout 2026.
RBC Capital Markets
The January FOMC seems very unlikely to shake up the market narrative. The FOMC is widely expected to leave rates unchanged for the first time since July. Markets have been fully pricing a pause for much of the inter-meeting period, and Fed speakers have made no attempt to push back. But even as they pause, the Fed will almost certainly maintain their cutting bias – suggesting that further cuts will be warranted if the data shows sufficient progress on inflation. This is largely consistent with current market pricing (although our modal call is for no additional cuts this year). Unlike the December meeting, there will be no SEP update to shape the post-FOMC narrative. So, any potential market reaction likely hinges on Powell’s press conference. Powell will likely take a slightly more constructive tone on inflation than his “fallen apart” comment in December. We expect he will echo other recent Fed speakers in saying that the data is generally in a good spot and that they have the luxury of time in deciding what to do next. But given the market’s hawkish lean since the December FOMC, any reduction in the Fed’s inflation concerns could be capable of driving a dovish market response (even if a very modest one).
Goldman Sachs
The January FOMC meeting is unlikely to offer much new information. The statement might note that the labor market appears to have stabilized but is unlikely to provide strong guidance about the March meeting or the timeline for further cuts. In the press conference, we will listen for hints about whether the further decline in inflation we expect in coming months could open the door to rate cuts, how strongly the leadership feels that the current level of the funds rate is still “meaningfully restrictive” and not an appropriate stopping point, and how the FOMC intends to navigate uncertainty about potential tariff increases now and their impact on prices later. the FOMC’s decisions will likely hinge in large part on how the Committee chooses to handle tariffs. In our base case, tariffs would provide only a modest and one-time 0.3pp boost to inflation, causing it to fall by less but not to rise and leaving the door open to rate cuts. Even so, some FOMC participants might be reluctant to cut either because of uncertainty about what is coming or out of concern that their rate cuts might be blamed for any inflation boost from tariffs.
Our baseline forecast calls for two 25bp cuts this year in June and December and one more in 2026 because we expect inflation to keep falling and do not expect tariffs to restrain the FOMC indefinitely. But it is hard to have great confidence in the exact timing of cuts, both because our economic forecast—lower inflation and a healthy labor market—would not make the decision obvious, and because it is hard to know how the FOMC will choose to navigate tariffs this time. We have more conviction, however, that market pricing as a probabilistic statement about possible Fed paths in coming years is too hawkish, and in particular that the market-implied probability of rate hikes is too high. We are skeptical that the new administration’s policies will be inflationary enough for the FOMC to seriously consider raising the funds rate from a level that it already sees as restrictive, and we worry that the lesson of 2019—when tariffs unsettled the equity market and contributed to the FOMC delivering “insurance cuts”—is being ignored.
Previous Release
On December 18th at 2 PM ET, the FOMC cut rates by 25 bps from 4.75% to 4.5%, and released the last Summary of Economic Projections.
The SEP was perceived as much more hawkish for the future outlook for the US economy and monetary policy, which caused quite a dramatic repricing in future US interest rate moves.
The Fed projections show 1/19 officials see no cuts in 2025, 3/19 see one cut, 10/19 see 2 cuts, 3/19 see 3 cuts, 1/19 sees 4 cuts, and 1/19 sees 5 cuts.
On the median, that means FOMC officials see only 2 cuts next year.
Market expectations saw between 2-3 cuts next year ahead of this announcement.
They also upwardly revised their near-term GDP forecasts to 2.1% from 2%.
With this, they also brought up their 2025-end PCE expectations to 2.5% from 2.1%, but made a downward revision to the unemployment rate, seeing it at 4.3% by the end of next year from 4.4% last SEP.
This caused US interest Rate futures to reduce bets on further Fed easing next years, as the markets more closely align their pricing with the view of the median FOMC policymaker following the release of this SEP.
This repricing can be seen in the strength in the dollar and weakness in the S&P 500.