The Federal Reserve may "hold steady" next week, economists expect: rate cuts need to wait for Powell's "final curtain"

Strong economic growth momentum and persistently stubborn inflation data are reshaping market expectations for the Federal Reserve's monetary policy path. According to the latest survey, the Federal Reserve is likely to keep interest rates unchanged at next week's meeting, and the possibility of a rate cut this quarter has significantly decreased, with the monetary easing window potentially being delayed until after Federal Reserve Chairman Jerome Powell's term ends in May this year.

A Reuters survey conducted from January 16 to 21 among 100 economists found that all respondents expect the Federal Reserve to maintain the benchmark interest rate in the range of 3.50%-3.75% at the meeting on January 27-28. More critically, 58% of the surveyed economists currently predict that interest rates will remain unchanged throughout the first quarter, a significant shift from last month when most expected at least one rate cut in March.

Although most economists still expect at least two rate cuts later this year, the strong economic fundamentals do not support immediate easing in the short term. The survey indicates that while there is no absolute consensus on the outlook beyond the first quarter, a slight majority (55 out of 100 respondents) expect that the rate cut cycle will not restart until after Powell steps down as Federal Reserve Chairman in May.

This adjustment in policy expectations comes amid heightened political maneuvering in Washington. President Trump has repeatedly criticized Powell for insufficient rate cuts, and with the Justice Department filing criminal charges against Powell related to the renovation of the Federal Reserve headquarters, concerns about the independence of monetary policy being influenced by political interference are rising.

Upward Revision of Economic Growth Expectations Supports "Hawkish" Stance

The resilience shown by the U.S. economy is the main reason supporting the Federal Reserve's decision to remain on hold in the short term. The survey shows that the U.S. economy grew at a robust rate of 4.3% in the third quarter. Respondents have revised their economic growth expectations for this year from last month's forecast of 2.2% to 2.3%, a growth rate significantly higher than the Federal Reserve's estimated non-inflation growth rate of 1.8%.

Bernard Yaros, the chief economist for the U.S. at Oxford Economics, who had a very high accuracy in last year's predictions, expects the U.S. economy to grow by 2.8% this year, above the general market consensus. Yaros points out that continued investment in artificial intelligence will drive strong GDP growth through 2026, while tax cuts under the fiscal legislation will be a key driver. He estimates that the boost from this legislation will increase the average annual growth rate of real GDP by 0.6 percentage points this year.

Strong growth also means that inflation may remain elevated for the next few years. The survey indicates that the preferred inflation measure of the Federal Reserve—the Personal Consumption Expenditures (PCE) price index—is expected to remain above the 2% target for the remainder of this year, with average values for each calendar year until 2028 also projected to exceed this target. Meanwhile, the unemployment rate is expected to remain stable, averaging 4.5% this year.

Rate Cut Window May Open with Leadership Transition

Given the current economic data, some analysts believe the Federal Reserve even has reason to consider raising rates, but the baseline forecast still points to "maintaining the status quo." LSEG StarMine calculations show that Jeremy Schwartz, a senior U.S. economist at Nomura Securities, was one of the most accurate analysts in predictions last year. He stated that while the surface economic outlook suggests the Federal Reserve should remain on hold, and may even consider raising interest rates later this year or next, in practical terms, the Federal Reserve may remain inactive until Powell's term ends in May.

Jeremy Schwartz expects that the new leadership at the Federal Reserve may manage to push for an additional 50 basis points cut later this year.

Political Friction Increases Market Uncertainty

In addition to economic data, political factors are increasingly disrupting the backdrop for Federal Reserve decision-making. Currently, there is significant disagreement among Federal Reserve policymakers regarding the outlook, while external pressures remain unabated.

In addition to the criminal charges against Powell, Trump's attempt to remove Federal Reserve Governor Lisa Cook is also awaiting a hearing from the Supreme Court. Treasury Secretary Yellen recently stated that Trump may decide on the next Federal Reserve chair as early as next week.

In this regard, Bernard Yaros warned that due to the existence of a criminal investigation, the selection process for the next chair will face unprecedented resistance. He believes that Trump may find it difficult to fully appoint candidates inclined towards rate cuts to fill the vacancies at the Federal Reserve. This political uncertainty has become a risk variable that investors cannot ignore when assessing future interest rate paths