The January FOMC meeting concluded with a pause in rate cuts, aligning with market expectations. The federal funds target rate range was maintained at 3.5%-3.75%. Among the 12 FOMC voting members, two dissented, with Governors Milan and Waller advocating for a 25 basis point reduction.
Consistent with the decision to pause, the meeting statement displayed a marginally more optimistic tone regarding economic and employment conditions. The characterization of economic growth shifted from "moderate expansion" to "solid expansion." While "job gains have remained low," the description of the unemployment rate changed from "edged up" to "shown some signs of stabilization." The statement on inflation removed the phrase "moved up since earlier in the year" but retained that it "remains somewhat elevated."
During the press conference, Chair Powell indicated that the risks of rising inflation and declining employment have diminished. He emphasized that future decisions are not predetermined and that further rate hikes are not the base case. Media attention focused on "Federal Reserve personnel matters" and "financial market volatility" (including fluctuations in the U.S. dollar exchange rate and rising precious metal prices), which Powell consistently sidestepped, offering no commentary.
Where is the focus for Federal Reserve rate cuts this year? Regarding the pace and magnitude of potential rate cuts this year, the primary economic focus lies with the trend of employment recovery, rather than constraints from inflation. From a non-economic perspective, the emphasis shifts to potential fiscal stimulus driven by election pressures, rather than changes in Federal Reserve leadership.
From an economic standpoint, the critical factor is the trajectory of employment recovery, not inflationary pressures. Concerning employment, 100,000 may be the pivotal threshold. The labor market weakness observed since 2025 stems from structural factors like tighter immigration policies, government layoffs, and AI adoption, alongside a broader decline in employment demand due to restrictive monetary policy, marginal fiscal contraction, and trade policy uncertainties. This year, a benchmark of 100,000 new non-farm payrolls per month—implying employment growth on par with 2024, excluding structural factors—could serve as the Fed's cut-off point for rate cuts. If job growth steadily recovers toward 100,000 per month in the coming months, the Fed may maintain its pause and adopt a wait-and-see approach. Should job gains rebound swiftly and stabilize at or above 100,000 per month, the Fed might find little justification for further reductions.
Regarding inflation, it should not be viewed as a preemptive constraint on Fed rate cuts but rather as a lagging economic indicator. Tariff impacts have likely peaked; barring additional trade policy disruptions, a significant rebound in core goods inflation appears unlikely. A resurgence in food and energy inflation is also improbable. With the labor market yet to show a clear recovery trend, super-core services and housing inflation continue their gradual descent. Under baseline assumptions, the risks of rising inflation remain subdued.
From a non-economic perspective, the key lies in potential fiscal stimulus driven by midterm election pressures—which could potentially derail rate cut expectations in the latter half of the year—rather than changes in Federal Reserve personnel. Changes in Fed leadership are unlikely, under baseline conditions, to cause a significant shift from the current cautious stance toward unexpectedly dovish rate cuts. First, given Powell's current neutral posture and firm commitment to preserving Fed independence, the so-called "shadow Fed chair" following the announcement of a new nominee is unlikely to pressure him significantly before his term ends. Second, while the leading candidates for chair—be it BlackRock's Riedl, former Governor Warsh, or current Governor Waller—lean dovish and support rate cuts, they have all expressed support for Fed independence and show no inclination for surprise rate reductions. The highest-probability candidate, Riedl, supports two rate cuts this year, aligning with market expectations, though their views could evolve. Third, the annual rotation of regional Fed bank presidents among FOMC voters this year is not expected to introduce additional dovish influence.
The primary non-economic focus is on potential fiscal stimulus driven by midterm election pressures. K-shaped economic divergence and the "cost-of-living crisis" are top issues motivating voters. Recent firm statements by former President Trump about "winning the midterm elections" suggest that if current non-spending measures prove ineffective, he might propose additional fiscal stimulus to gain voter support, posing significant upside risks to both economic growth and inflation. With primary elections running from March to September, the timing for any potential additional fiscal stimulus, should it materialize, would likely be around mid-year.
Risk warnings: Uncertainty surrounding the midterm elections; potential oil price increases due to geopolitical conflicts.