The Federal Open Market Committee (FOMC) is not expected to lower interest rates at its January 29 meeting. Current market projections, as outlined by the CME FedWatch Tool, suggest a 99.5% probability that rates will remain at their current level of 4.25% to 4.5%. However, the possibility of a rate cut in March or May remains on the table, with fixed-income markets pricing in an even chance for such moves.

Labour Market Strength Reduces Urgency for Rate Cuts

December's employment data painted a picture of a resilient job market. Federal Reserve Governor Lisa Cook recently noted the robustness of the labour market, highlighting low unemployment rates and wage growth outpacing inflation. These sentiments, shared prior to the latest jobs report, align with the data showing continued strength in job creation.

This resilience in the labour market tempers the need for immediate rate cuts. However, inflation dynamics could still sway FOMC decisions. Consumer Price Index (CPI) data through December indicate a moderate inflation environment, trending closer to the Fed’s 2% target. Current inflation metrics hover around 3% annually, a notable improvement from previous highs.

Differing Views Among Fed Officials

Federal Reserve Governor Michelle Bowman recently outlined her case for caution regarding additional rate cuts. Speaking on January 9, Bowman emphasized the significant progress made in recalibrating policy, referencing the cumulative 100 basis points reduction since September. She expressed satisfaction with maintaining a flexible, data-driven approach, adding, “It is important that we remain focused on returning inflation to 2 percent.”

In contrast, Governor Christopher Waller offered a more optimistic perspective on disinflation during a speech in France on January 8. Waller highlighted recent declines in core Personal Consumption Expenditures (PCE) inflation, which stood at 2.8% for the 12 months ending in November. While acknowledging minimal progress, Waller expressed confidence that inflation would continue its downward trajectory, potentially justifying further rate cuts over the medium term.

Inflation Trends in Focus

Inflation data remains a pivotal factor in the FOMC’s deliberations. Core inflation, excluding food and energy, rose to an annual rate of 2.9% in December, up from 2.4% in September. This uptick has tempered expectations for near-term cuts, but upcoming PCE inflation data could influence decisions. The December PCE inflation report, due on January 29, coincides with the FOMC’s rate announcement, providing critical context for future policy moves.

No Rate Cuts Expected in January

While the January 29 meeting is unlikely to result in a rate cut, the outlook for March 19 and May 7 remains more fluid. Additional signs of disinflation could prompt action at those meetings. However, the current robustness of the job market and persistent core inflation above target suggest the Fed may opt to hold steady for now.

Economic data in the coming months will be critical, with a particular focus on whether inflation trends convincingly towards the 2% target. Additionally, broader economic policies under the Trump administration could further shape monetary policy decisions. For now, the FOMC’s approach remains firmly anchored in a data-dependent framework, leaving room for adjustments as economic conditions evolve.