Expect No Change in Fed Policy — Evening Brief – 01.28.25
Investors this week will closely monitor whether the Federal Reserve and the bond market align with President Donald Trump’s “demand” for lower interest rates. While the central bank is unlikely to base its decisions on directives from the White House, Trump’s 2.0 policy agenda is expected to influence economic considerations in some capacity.
Fed funds futures indicate that the Federal Reserve is likely to keep its target rate unchanged in the 4.25% to 4.50% range at Wednesday’s Federal Open Market Committee (FOMC) meeting. Fed funds futures are pricing in 97% odds of no change to interest rates per the CME FedWatch Tool. The March 19 FOMC meeting presents a more significant possibility for a rate cut. However, futures currently assign a 58% probability to rates remaining steady, making the outcome almost a coin flip at this stage.
With minimal likelihood of a significant policy change this month, no Summary of Economic Projections (SEP) scheduled for release, and limited updates expected to the FOMC’s Monetary Policy Statement beyond adjusting labor market assessments, Fed Chairman Jerome Powell’s press conference is poised to be the primary driver of market volatility.
“The FOMC is likely to hold policy steady at this week’s meeting given the recent signs of a pickup in economic growth. The labor market, consumer spending, manufacturing, and housing all perked up into the end of the year,” Bryan Jordan, Cycle Framework Insights, Inc chief strategist, shared in an email with Connect.
“Beyond this week, it remains likely that the easing cycle will resume by the summer due in large part to the ongoing, if uneven, pullback in inflation pressures,” he added.
Meanwhile, the U.S. Treasury market indicates a neutral monetary policy outlook, as reflected in the near-zero spread between the 2-year Treasury yield (4.27%) and the effective Fed funds rate (EFF). This contrasts with previous periods where the 2-year yield was significantly below the EFF, suggesting expectations of rate cuts.
Some analysts anticipate interest rate cuts in March and June, but uncertainty surrounding Trump’s policies—such as tariffs, tax cuts, and immigration—complicates the outlook. These factors could significantly impact economic activity and inflation, which are key considerations for Fed decisions.
The growing federal deficit and persistent “sticky” inflation since last summer suggest the Federal Reserve may adopt a cautious approach to further interest rate cuts. Uncertainty around economic and fiscal policy developments adds to the need for clarity before making decisive monetary policy adjustments.
“We expect a stagflationary policy mix from the new Trump administration,” noted Bradley Saunders, North America economist for Capital Economics. In a research note, he estimates that risk is “tilted to fewer cuts depending on the exact timing of Trump’s policy implementation.”
“The new administration’s policies will on balance lower the economic growth rate and in turn prompt an easier monetary policy stance,” added Jordan. “Trade policy uncertainty was a significant driver behind the Fed’s rate cuts in 2019, which came in spite of solid job growth and the lowest unemployment rate in five decades and could well be the trigger for further easing this year as well.”
The Federal Reserve is unlikely to be swayed by political directives, but economic activity influenced by Trump’s policy agenda could affect inflation and growth expectations. These dynamics may lead the Fed to tread cautiously in navigating its monetary policy, emphasizing data-driven decisions amid political and fiscal uncertainty.