We expect Chair Powell to deliver a neutral FOMC meeting on Wednesday and not substantially change the message of the hawkish December meeting. The solid December jobs report and Trump’s policy uncertainty will keep officials comfortable pausing rate cuts for now, but slower core CPI inflation means Powell might continue to guide towards further cuts this year. We see two rate cuts in entire CY25 (in H2 mostly) as we await Trump’s policies on tariffs. While till now Trump has sounded more conciliatory on China, we believe future is still uncertain even though the first week of President Trump’s second term did not yield any major economic policies. Recent labor data have reinforced the idea that downside risks to the labor market have diminished. The latest reading in the unemployment rate nearly rounded down to 4.0% and revisions to seasonal factors now show it never hit 4.3% last year. Inflation data have on balance been positive since the December FOMC meeting. For core PCE, we expect December to print at .21 bps MoM. We believe Fed officials would like to get through Q1CY25 inflation data without elevated prints and gain greater clarity around trade, tax and immigration policies to feel more confident inflation is truly on a sustainable trajectory to 2%, particularly given evidence of strong growth and a stabilizing labor market. Patience is key to Fed policy making at this point of time with significant policy uncertainty, a solid employment situation & a moderating inflation.
