The Federal Reserve's interest rate meeting is approaching: discussions on monetary policy have taken a back seat, and Powell's successor has become the focus

This week's Federal Reserve meeting (January 29) is no longer solely focused on interest rate decisions, but rather on the severe challenges facing the independence of the central bank. With the Trump administration launching a criminal investigation against current Chairman Jerome Powell and attempting to dismiss Governor Christopher Waller, this typically procedural policy meeting is shrouded in political turmoil, and the market is closely watching whether the Federal Reserve can maintain its institutional defenses during this critical power transition.

The market generally expects the Federal Reserve to keep the benchmark interest rate unchanged in the range of 3.50%-3.75% at this week's meeting. After months of divergence, there seems to be a renewed consensus among decision-makers, with several officials suggesting that the current interest rate level is in a "neutral" zone that can support employment while suppressing inflation. However, this decision to pause interest rate cuts may further anger President Trump, who is calling for significant rate cuts to boost the economy.

Compared to the calm policy expectations, investors are focused on the nomination of Powell's successor and the legal pressures he faces. Trump is expected to announce the new Federal Reserve Chair nominee soon, and whether Powell will continue to serve as a governor after stepping down in May, thereby balancing the power of his successor, remains the biggest suspense. Despite ongoing political noise, bond yields and inflation expectations remain stable, indicating that the market has not lost confidence in the Federal Reserve's institutional safeguards.

Successor Nomination and Power Transition

Trump is expected to announce Powell's successor nomination as early as this week, which will be a key step in his attempt to gain full control of the Federal Reserve. The final candidate list includes Trump's economic advisor Kevin Hassett, Federal Reserve Governor Christopher Waller, former Governor Kevin Warsh, and Rick Rieder, head of bond investments at BlackRock.

Analysts point out that whoever takes over will need to persuade other decision-makers in the Federal Open Market Committee (FOMC) to support interest rate cuts, rather than simply following presidential directives. Tim Duy, chief U.S. economist at SGH Macro Advisors, believes that Trump needs a larger-scale personnel change to fully control the agency. If Powell chooses to remain in his governor position after stepping down as chair—an authority he possesses—he will become a key swing vote, and this potential move is seen as a direct counter to Trump's pressure.

Interest Rate Outlook and Economic Data

The latest economic data supports the Federal Reserve's decision to "stay put," indicating no urgent need for action. Despite weak job growth, the unemployment rate fell to 4.4% in December, and consumer spending remains strong. On the inflation front, the PCE price index, which the Federal Reserve monitors, slightly exceeded expectations in November, reaching 2.8%. Based on this, investors currently expect the Federal Reserve to pause interest rate cuts until June.

Wall Street has quickly adjusted its expectations, with swap contracts indicating that the next rate cut is delayed until mid-year, and some institutions have even completely abandoned bets on rate cuts in 2026. Key officials, including New York Fed President John Williams, believe that current interest rates are in a "favorable position." Michael Pearce, chief U.S. economist at Oxford Economics, pointed out that unless there is a decisive weakening in the labor market, the Federal Reserve is unlikely to cut rates significantly or ahead of schedule

Legal Disputes and Political Maneuvering

The legal battle outside the conference room is intensifying, making Powell's upcoming press conference on Thursday highly anticipated. Powell is facing a criminal investigation by the Department of Justice regarding testimony related to the Federal Reserve building renovation, along with a subsequent grand jury subpoena. Powell has rarely issued a video statement, claiming that this is pressure and intimidation motivated by politics.

Meanwhile, the Supreme Court hearing regarding Trump's attempt to dismiss Governor Cook indicates that the judges are inclined to uphold Cook's position, which somewhat alleviates market concerns about an immediate collapse of central bank independence. Trump has openly stated that the issue with nominees is that "they change once in office," implying his dissatisfaction with the Federal Reserve's independent decision-making mechanism.

Internal Consensus and Dissenting Voices

Despite significant external pressure, the FOMC has returned to calm from earlier divisions. The vast majority of decision-makers feel comfortable maintaining the status quo, as tensions caused by differing concerns over inflation and employment have eased.

Currently, there are only a few dissenting voices: Federal Reserve Governor Stephen Miran, who is on leave from the Trump administration, is calling for a significant rate cut of 150 basis points this year, while Michelle Bowman warns against signaling a pause. However, with Christopher Waller, who previously advocated for rate cuts, also stating that they can "take their time," the Federal Reserve has shown a rare unity in this meeting, even though this unity may face new challenges amid upcoming leadership changes.