(The opinions expressed here are those of the author, a columnist for Reuters)
By Jamie McGeever
ORLANDO, Florida, Feb 12 (Reuters) - What would need to happen for the Federal Reserve to raise U.S. interest rates? If economic factors were the sole consideration, the answer would likely be “not much at all”.
So the fact that the current market debate surrounds the number of expected rate cuts this year should give pause to investors and policymakers alike.
The case for raising rates is every bit as strong right now as the case for putting cuts on hold and maintaining an easing bias. Maybe stronger.
But as outgoing Fed Chair Jerome Powell said last month, nobody on the 19-strong rate-setting Federal Open Market Committee considers it likely that their next move will be a hike.
Interest rate futures traders, having heard the message loud and clear, continue to anticipate two quarter-point cuts by December, with the door creaking open for a third.
It’s a pretty dovish stance relative to the incoming economic data and outlook.
<h3>DATA JUSTIFIES MORE BALANCED STANCE</h3>
Take jobs numbers. The Fed justified its 75 basis points of easing late last year as “insurance” against a weakening labor market.
But the January figures on Wednesday suggest the labor market is stabilizing, just as Powell previously indicated. Job growth was almost twice as strong as expected, the unemployment rate fell, and wage growth was slightly hotter than forecast.
That’s not the whole story, of course. Annual benchmark revisions show the economy created nearly 900,000 fewer jobs in the year through March than estimated, and the unemployment rate is being held back only by a sharp slowdown in labor supply growth.
But the labor picture seems to be stabilizing, and the unemployment rate is, regardless of the cause, still low at only 4.3%. If labor market risks are decreasing, what’s left to justify further rate cuts?
Inflation is around a percentage point above the Fed’s 2% target, having exceeded that level for five years running. Meanwhile, the fiscal whoosh from the Trump administration’s “One Big Beautiful Bill” is coming this year, along with an enormous artificial intelligence capex boom.
What’s more, financial conditions are the loosest in years, and annualized GDP growth is running above potential.
Kevin Warsh, Trump’s nominee to replace Powell, has said AI-fueled productivity can help lower inflation and allow the Fed to cut rates. But strong productivity also implies faster growth, and therefore a higher neutral rate of interest, or “r-star”. As Powell said last month, the Fed is probably already in neutral territory.
<h3>LOWER THAN SWITZERLAND?</h3>
In the realm of plausible scenarios, what would tilt the Fed’s bias toward higher rates? Or, put another way, what would it take for financial markets to price in the possibility that the Fed’s next rate move would be a hike?
Inflation rising above 3%, the unemployment rate falling below 4%, or clear evidence of a GDP growth boom?
The concern is that the Fed’s perceived dovish bias now and, more notably, moving forward is rooted not in data, but in politics.
The Trump administration’s attacks on the central bank have increased the sense of political capture of the institution, and the replacement of Powell with a new Trump appointee in May will only solidify that perception.
There certainly is no denying that Trump wants lower interest rates.
“We should be the lowest interest rate in the world,” Trump told Fox Business this week. “Switzerland’s just about the lowest. This country should have the lowest interest rates in the world.”
Switzerland’s benchmark policy rate is 0%.
Trump recently joked that he would sue Warsh if he did not cut rates later this year. Trump later brushed off this comment as humor. But given that his administration is trying to fire a Fed governor and the Department of Justice has opened a criminal investigation into the sitting chair, not everyone will see it as lighthearted banter.
Trump was clearly not joking in an interview with NBC last week, in which he said Warsh “would not have gotten the job” if he had indicated he wanted to raise rates.
Of course, the chair is only one of 12 voters at any policy meeting, the FOMC’s “hawks vs doves” spectrum could be fairly balanced this year, and the central bank is still an independent institution.
But the fact remains that markets can’t price the likelihood of interest rate changes based solely on data, and increasingly have to factor in the expected political thumb on the scale. That’s an uncomfortable position for all involved.
(The opinions expressed here are those of the author, a columnist for Reuters)
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Where experts think the Fed is headed
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Reuters poll: U.S. Fed policy may be too loose under nomiknee Kevin Warsh
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Where policymakers expect to steer interest rates
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How interest rates have changed among G10 central banks
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(By Jamie McGeever; Editing by Joe Bavier)

- The article discusses the Federal Reserve's position on potential interest rate changes amid economic indicators.  
- Despite improving labor market data and a stable unemployment rate, there is ongoing speculation about rate cuts influenced by political pressures rather than economic fundamentals.  
- The author highlights concerns over the Fed's independence and the potential for future rate increases depending on inflation and growth metrics.

ROI-What would it take for the Fed to raise rates?: McGeever