The FOMC is likely to keep rates on hold at its 29th January meeting, with guidance continuing to signal a higher threshold for future rate cuts. It might also signal that there is no expectation of action at the March meeting. Fed Chair Powell will likely reiterate that policy is “in a good place” to respond to future developments and that rates are currently “within a range of plausible estimates of neutral.” On the economic outlook, the policy statement & press conference might present a somewhat more upbeat view about the economy. The statement is likely to upgrade the growth assessment to “solid”, note tentative evidence that unemployment has stabilized, and hint at an improving balance of risks to the outlook. Powell press conference might have more questions on Fed's independence than macro economic data. Powell will likely be asked about the DOJ investigation into his Senate testimony as well as the recent Supreme Court arguments around President Trump’s attempt to fire Governor Cook. We expect Powell to largely avoid these questions, referring back to his 11 January video message without further comments. Our own expectations is on a long hold till May when Powell leaves as Chair & two cuts of 25 bps each in June & Sep as a new Fed Chair takes office. Currently the inflation employment dynamics are in a stable orbit implying no rush for cuts. We do see recent legal actions as raising the potential for Powell to stay on as a governor. Indeed, if the administration insists on following through with a criminal prosecution of Chair Powell, and Senate Republicans stand firm in not advancing nominees to the Federal Reserve Board, it is likely the FOMC would choose Powell to remain on as chair. But this is not our base case. We currently do not have any strong views on UST yields seeing the 10yr UST between 4.20-4.40 for short term. On DXY, the continuous erosion of policy stability from Trump administration has led to DXY weakness below 98 levels this week. Currently at 97.6 levels, we expect it to retest the Sep’25 lows of 96.5 levels. Markets will be more focused on the announcement of new Fed Chair. Our own view is Rick Rieder has the strongest chance of clearing senate confirmation. He is also a market friendly face and should be seen as +ve for Fed’s credibility as an independent central bank. Rieder also is an avid golf player which provides him a special bonding with Trump. Polymarket ranked the probability of a Rieder chairmanship at just 3% till last week. But on Friday afternoon, those odds jumped past 40%, putting him above former Fed Gov. Kevin Warsh as the leading contender.
