The Federal Reserve may "stand pat" next week; economists predict a rate cut will have to wait until after Powell's "exit."

Robust economic growth momentum and still stubborn inflation data are reshaping market expectations for the Federal Reserve’s policy path. According to the latest survey, the Fed is likely to keep interest rates unchanged at next week's meeting, and the likelihood of a rate cut this quarter has dropped significantly; the window for monetary easing may be postponed until after Fed Chair Powell’s term ends in May this year.

In a Reuters survey of 100 economists conducted from January 16-21, all respondents expect the Fed to keep its benchmark interest rate at 3.50%-3.75% at its meeting on January 27-28. More crucially, 58% of surveyed economists now predict that rates will remain unchanged for the entire first quarter—a significant shift from last month, when most expected at least one rate cut in March.

Although most economists still expect at least two rate cuts later this year, in the near term, robust economic fundamentals do not support immediate easing. The survey indicates that, while there is no absolute consensus on the post-first-quarter outlook, a slim majority (55 of 100 respondents) believe that the rate-cutting cycle will not restart until after Powell steps down as Fed Chair in May at the earliest.

This adjustment to policy expectations comes amid intensifying political wrangling in Washington. President Trump has repeatedly criticized Powell for not cutting rates enough, and with the Justice Department bringing criminal charges against Powell related to renovations at the Fed headquarters, there are growing worries in markets about political interference with monetary policy independence.

Upgraded Growth Expectations Support “Hawkish” Stance

The resilience shown by the U.S. economy is the main reason supporting the Fed's decision to hold steady in the short term. The survey shows that U.S. economic growth reached a strong 4.3% in Q3. Respondents have revised this year’s growth expectation upwards from last month’s 2.2% forecast to 2.3%, a pace that is well above the Fed’s estimated 1.8% non-inflationary growth rate.

Bernard Yaros, chief U.S. economist at Oxford Economics, whose predictions last year were highly accurate, forecasts U.S. economic growth of 2.8% this year, above general consensus. Yaros points out that sustained investment in artificial intelligence will drive strong GDP growth in 2026, and tax cuts under fiscal legislation are a key driver. He estimates that the law will lift this year's real GDP growth rate by 0.6 percentage points.

Strong growth also means that inflation may remain elevated for years to come. The survey finds the Fed’s favored inflation gauge—the Personal Consumption Expenditures (PCE) price index—will continue to run above the 2% target for the rest of this year, and the average for each calendar year until 2028 will also exceed the target. Meanwhile, unemployment is expected to remain stable, averaging 4.5% this year.

The Rate Cut Window May Open With Leadership Change

Given current economic data, some analysts believe the Fed even has grounds to consider raising rates, but baseline forecasts still point to “holding steady.”

LSEG StarMine data shows Nomura Securities senior U.S. economist Jeremy Schwartz was among the most accurate forecasters last year. He says that although the surface outlook suggests the Fed should remain on hold, and could even consider rate hikes later this year or next, in practice, the Fed may stand pat until Powell's term ends in May.

Jeremy Schwartz expects that after appointment of new Fed leadership, there may be another 50 basis points rate cut later this year.

Political Friction Heightens Market Uncertainty

Beyond economic data, political factors are increasingly interfering with the background for Fed decisions. Currently, Fed policymakers themselves are deeply divided on the outlook, and external pressure remains intense.

In addition to criminal charges against Powell, Trump’s bid to dismiss Fed Governor Lisa Cook is awaiting Supreme Court hearing. Treasury Secretary Besant recently stated that Trump could decide on the next Fed Chair as early as next week.

On this, Bernard Yaros warns that, due to the criminal investigation, the selection process for the next Fed Chair will face unprecedented obstacles. He believes Trump will struggle to fill Fed vacancies solely with rate-cutting advocates. This element of political uncertainty has already become a risk variable that investors cannot ignore when assessing the future interest rate path.

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