"New Federal Reserve News Agency" Outlook for January FOMC Meeting: Expected to Pause Rate Cuts, Uncertainty Remains on Restarting Easing Path

Renowned financial journalist Nick Timiraos, known as the "new Federal Reserve correspondent," wrote that Federal Reserve officials are expected to pause interest rate cuts for the first time since last September this week, choosing to hold steady after three consecutive rate reductions. Timiraos stated that the Federal Reserve is expected to make only minor adjustments in Wednesday's policy statement and maintain the benchmark interest rate in the range of 3.5%–3.75%. If Federal Reserve officials continue to retain the wording regarding "further adjustments to interest rates," it would indicate that they are not yet ready to signal a long-term pause. Timiraos pointed out that the more challenging question is: what conditions would prompt the Federal Reserve to initiate rate cuts again? Timiraos believes the answer depends on which risk manifests first: a significant deterioration in the labor market or a convincing decline in the inflation rate back toward the 2% target level. Since the last meeting of Federal Reserve officials in December, neither of these situations has occurred. Employment growth has significantly slowed, but the unemployment rate has stabilized. The inflation rate still hovers around 2.8%, above the Federal Reserve's 2% target; however, some officials believe that if the impact of tariffs is excluded, the underlying inflation trend is actually closer to the target level. As a result, the Federal Open Market Committee (FOMC) is currently in a wait-and-see mode, even as the White House is exerting unprecedented political pressure on the Federal Reserve. Most Federal Reserve officials still believe that a rate cut is possible later this year, but there is disagreement on when the data will be sufficient to support such an action. In December, 12 of the 19 Federal Reserve officials expected at least one more rate cut this year. However, that rate cut faced opposition from two officials who did not support any cuts; those in favor of a rate cut also had reservations, as indicated in the meeting minutes. This means that the threshold for further rate cuts has been raised. The Federal Reserve leadership likely hopes to establish a stronger consensus than in December, and building that consensus will require more convincing evidence of declining inflation. Federal Reserve officials have differing views on how to measure inflation progress. Some (including Powell) have stated that the impact of tariffs can be "ignored," believing that tariffs only lead to a one-time price increase. By this measure, the underlying inflation trend is already close to 2%. However, other officials are more focused on official statistics, which are likely to remain close to 3% in the first half of this year. Bridging this divide may take several months of data. Federal Reserve officials will closely monitor inflation data in the first few months of this year, paying attention to whether businesses experience unusually large price increases when repricing in the new year. A key question is whether retailers have fully absorbed the inventory purchased before the higher tariffs took effect and have begun passing on higher costs to consumers. If the annual price adjustment is moderate, it could eliminate a significant obstacle to rate cuts. Timiraos cited analysts saying that if rate cuts occur before mid-year, they would almost certainly need to be accompanied by a deterioration in the labor market, as the pace of inflation decline may not be sufficient to persuade skeptical officials before then. Over the past 18 months, inflation has made little substantive progress The reasons for continuing to lower interest rates stem from concerns that arose when the rate-cutting cycle was initiated last year: the job market is weaker than it appears on the surface, and high interest rates are a significant cause of this weakness. According to estimates from Federal Reserve staff, if government employment data is adjusted downward, the monthly increase in jobs may be closer to zero rather than the levels indicated by unofficial data. Timiraos cites Philadelphia Federal Reserve President Anna Paulson, who stated that nearly all new jobs in the private sector last year came from the healthcare and social assistance sectors. If an economy is truly robust and healthy, it seems it should not create jobs solely in a single industry. Timiraos expects at least one dissenting vote at this meeting, coming from Federal Reserve Governor Stephen Miran. Since joining the committee last September, he has advocated for more aggressive easing policies at every meeting but has not been successful. Additionally, analysts believe that Federal Reserve Governors Michelle Bowman and Christopher Waller may also vote in favor of lowering interest rates, as their concerns about the job market are greater than those of some of their colleagues. Even if all three support a rate cut, the level of disagreement within the committee will be less than in December of last year. At that time, dissent came from two directions: Miran believed the rate cut was not large enough, while two regional Fed presidents opposed any rate cuts. If there is a dissenting vote this week, it will only come from the same direction. Timiraos points out that Waller's voting stance may receive special attention. He is one of the candidates being considered by Trump to potentially replace Powell. If he votes in favor of a rate cut, it would align with Trump's repeated statements that he "will not choose anyone who opposes his demand to lower financing costs," which would help enhance his otherwise low chances of competing for the position. However, if he chooses to align with the majority of officials and votes to maintain interest rates, while this may strengthen his professional image as an independent voice, it could also cost him the opportunity to become the Federal Reserve Chair. This month, the U.S. Department of Justice has launched a criminal investigation into Federal Reserve Chair Powell. Powell disclosed this in a shocking video statement, describing the investigation as an excuse to advance President Trump's demand for lower interest rates. Last week, the U.S. Supreme Court heard oral arguments on whether Trump has the authority to dismiss Federal Reserve Governor Lisa Cook, with several justices expressing skepticism about the president's power in this regard. Trump's advisors have previously hinted that he may soon announce a candidate to replace Powell, whose term as Federal Reserve Chair will end in May