Fed expected to hold rates this week as political storm intensifies around Powell

NEW YORK – The US Federal Reserve is widely expected to halt its interest rate cutting cycle this week, as a steadier jobs market restores a degree of consensus at the central bank after months of growing division.

Several officials, including some close to chairman Jerome Powell, have been signalling that rates are now in the right place – after three consecutive cuts – to shore up employment and still keep downward pressure on inflation.

“They are now essentially within the strike zone of neutral estimates,” said Mr Josh Hirt, senior US economist at the Vanguard Group, referring to the level where rates will neither restrain nor stimulate the economy.

“That brings about more caution, less urgency” for more cuts, he said. 

The meeting offers Mr Powell a chance to direct attention away from the political and legal dramas engulfing the Fed and back to the central bank’s core job of controlling inflation and maximising employment.

Any respite may prove short-lived. The expected decision to hold rates is likely to amplify the outrage of President Donald Trump, who wants them slashed.

The statement from the Federal Open Market Committee (FOMC) is due on Jan 28 at 2pm in Washington (3am on Jan 29, Singapore time), and Mr Powell will address reporters at 2.30pm. 

His remarks will be scrutinised for hints about how long the Fed might stay on hold, what could tilt the balance back towards cuts and whether the chairman has any new moves up his sleeve in the fight with Mr Trump.

‘Not as urgent’

On the economic front, fresh data has helped ease the tensions that tore the FOMC apart over recent months. 

A sharp slowdown in hiring spooked officials who worried the labour market might be near a tipping point. But another camp remained wary of inflation – and pushed back more vociferously with each rate cut.

By December, Mr Powell had a near-revolt on his hands, with as many as eight regional Fed presidents in opposition. The split was exacerbated by a lack of data due to the government shutdown.

Recent readings have taken some of the edge off the debate.

Underlying consumer price inflation for the year through December came in at a less than expected 2.6 per cent, helping settle the nerves of policy hawks.

On the jobs side, after rising to a four-year high of 4.5 per cent in November, unemployment has ticked back down.

Other labour market gauges also offered reassurance that there is no wave of layoffs in sight, even if hiring is sluggish.

“Overall, the situation is not as urgent to require any Fed policy action,” said Ms Yelena Shulyatyeva, senior US economist at The Conference Board.

She remains more worried about jobs than inflation, but sees the labour market in a “fragile equilibrium” for now, with gains concentrated in a handful of industries.

Wall Street shift

Investors in the Treasury market have positioned for an extended hold on rates. Swap contracts show the next cut is now expected in July, with the potential for another towards the end of 2026.

Wall Street analysts have pushed their 2026 rate cut bets into the later part of the year or, in JPMorgan’s case, scrapped them.

“There’s really no convincing argument that the Fed needs to really do anything here,” said Mr Gregory Faranello, head of US rates trading and strategy for AmeriVet Securities. “They’re on hold, short term.” 

Not every policymaker has been placated.

Fed governor Stephen Miran, who is on unpaid leave from his post as a senior adviser to Mr Trump, has called for 150 basis points in cuts in 2026. Vice-chairwoman for supervision Michelle Bowman said officials should avoid signalling the central bank will pause the easing cycle.

But other policymakers who have spoken since the December gathering have sounded comfortable with leaving rates where they are.

Aside from his post-meeting press conferences, Mr Powell has not spoken publicly on his policy views since Oct 14.

Even governor Christopher Waller, who back in June was the first Fed official to advocate for rate cuts, has toned things down. “Because inflation is still up, we can take our time,” he said on Dec 17, a week after the last meeting. 

‘Unusual times’

While internal harmony has nearly been restored, there is plenty of external heat.

Mr Powell’s post-meeting press conference will be his first public encounter with reporters since he was served grand jury subpoenas related to a Department of Justice (DOJ) investigation.

The DOJ is probing the Fed’s ongoing building renovations and Mr Powell’s testimony before Congress in 2025 about the project.

The move has rankled several Republican lawmakers and outraged Mr Powell, who blasted the subpoenas as a direct threat to the central bank’s ability to set interest rates free from “political pressure or intimidation”. 

His extraordinary response triggered speculation that Mr Powell may choose to remain as a Fed governor even after his tenure as chairman expires in May.

By doing so, he would deny Mr Trump another opening on the Board of Governors, and potentially undermine the ability of the next chairperson to influence rates.

The Fed chief is sure to get questions about his intentions come May, as well as the DOJ probe and the hearing he attended last week at the Supreme Court over the administration’s attempts to fire governor Lisa Cook.

The political squalls around the Fed are a sign of “unusual times” that could make rate meetings harder to call, said Mr Darrick Hamilton, an economist at the New School for Social Research. 

“I don’t expect that’s going to cause the current membership to steer differently than they otherwise would,” he said. Still, “pressure is there, and I suspect it will have an impact”. BLOOMBERG