"‘New Federal Reserve News Agency’ Preview of January FOMC Meeting: Expected to pause rate cuts, resumption of easing path remains unclear"

Nick Timiraos, a well-known financial journalist known as the "new Fed mouthpiece," wrote that Federal Reserve officials are expected to pause rate cuts this week for the first time since last September, choosing to hold steady after three consecutive rate reductions.

Timiraos stated that the Fed is expected to make only minor adjustments in its policy statement on Wednesday and keep the benchmark rate within the 3.5%–3.75% range. If Fed officials continue to keep language about "further rate adjustments," this would indicate they are not yet ready to signal a long-term pause.

Timiraos pointed out that the trickier question is: What circumstances would prompt the Fed to resume rate cuts? He believes the answer depends on which risk materializes first: an obvious deterioration in the job market or inflation falling convincingly back toward the 2% target.

Since the Fed's last meeting in December, neither scenario has occurred. Job growth has slowed significantly, but the unemployment rate has stabilized. Inflation remains around 2.8%, above the Fed's 2% target; however, some officials believe that if tariff effects are excluded, the underlying inflation trend is closer to the target.

Therefore, the Federal Open Market Committee (FOMC) is currently in a wait-and-see mode, even as the White House is exerting unprecedented political pressure on the Fed. Most Fed officials still believe a rate cut is possible later this year, but disagree on when the data will sufficiently support such a move.

Last December, 12 out of 19 Fed officials projected at least one more rate cut this year. However, that cut was opposed by two officials—they did not support any rate cuts; and even some who favored the cut did so with reservations, as reflected in the meeting minutes.

This means the threshold for further rate cuts has now been raised. Fed leadership is likely to seek a stronger consensus than last December, and building such consensus will require more convincing evidence of declining inflation.

Fed officials are divided over how to measure inflation progress. Some, including Powell, say tariff effects can be "ignored," believing tariffs only cause one-time price increases. By this measure, underlying inflation trends are already close to 2%. But other officials focus more on official statistics, which are likely to remain near 3% during the first half of this year.

Bridging this divide may require several months of data.

Fed officials will closely watch inflation data in the first months of the year, looking for whether companies raise prices abnormally when repricing in the new year. A crucial question is whether retailers have run through inventories bought before higher tariffs took effect and have started passing higher costs on to consumers. If annual price adjustments are modest, it may remove a major obstacle to rate cuts.

Timiraos cited analysts as saying, if rate cuts happen before mid-year, the labor market must almost certainly worsen, as inflation's decline may not be fast enough to convince skeptical officials before then. Inflation has made little substantial progress over the past 18 months.

The rationale for continued rate cuts arises from concerns that began last year when the cycle started: the job market may be weaker than it appears, and high interest rates are a significant contributor to that weakness. According to Fed staff estimates, factoring in potential downward revisions to government employment data, monthly payroll growth could be closer to zero rather than the official figures.

Timiraos cited Philadelphia Fed President Anna Paulson as saying that nearly all private-sector job gains last year came from healthcare and social assistance. If an economy is truly robust, it shouldn't be creating jobs in only one sector.

Timiraos expects at least one dissenting vote in this meeting, likely from Fed Governor Stephen Miran. Since joining the committee last September, he has advocated more aggressive easing at every meeting, but hasn't succeeded.

Additionally, analysts believe Fed Governors Michelle Bowman and Christopher Waller may also vote for rate cuts, as they are more concerned about the job market than some of their colleagues.

Even if all three support rate cuts, the degree of dissension would be less than in last December. At that time, opposition came from two directions: Miran thought the cut wasn't big enough, while two regional Fed presidents opposed any cuts at all. This week, any dissenting votes would come only from the same direction.

Timiraos noted that Waller's voting position may attract particular attention. He is one of the candidates Trump is considering to possibly replace Powell. If he votes for rate cuts, it aligns with Trump's repeated statements that he "won't choose anyone who opposes his push to lower borrowing costs," boosting his previously slim prospects for the chairmanship.

But if he sides with the majority and votes to keep rates unchanged, while this could strengthen his professional image as an independent voice, it may cost him the chance to become Fed Chair.

This month, the U.S. Department of Justice launched a criminal investigation into Fed Chair Powell. Powell announced the matter in a shocking video statement, describing the probe as an excuse to press President Trump's demand for lower rates. Last week, the Supreme Court heard oral arguments on whether Trump has the authority to fire Fed Governor Lisa Cook, with several justices expressing doubts about presidential power in this regard.

Trump's advisers have previously hinted that he may soon announce a replacement for Powell, whose term as Fed Chair ends in May.

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