The focus for the markets is once again back on the US Fed. Will Powell and team cut rates twice as expected, or will there be a pause – a long pause? Interest rate cuts by the Federal Reserve in 2026 are increasingly questioned by several experts, contradicting previous expectations that these cuts were inevitable. Polymarket predicts only 4% chance for the US Fed to cut rates by 25 bps in the FOMC Meeting to be held on January 27-28.
Unemployment Rate
In December, the unemployment rate decreased slightly to 4.4%, removing pressure on the Federal Reserve to implement rate cuts to protect the job market. The recent employment data showed slower hiring and a decrease in the unemployment rate, suggesting a stronger job market and diminishing chances of further rate cuts. This improvement in the job market shows that the unemployment rate appears less concerning than it was previously.
Inflation
Despite no increase in headline inflation and a dip in core inflation for December, the current US CPI level is still above the Fed’s 2% target.
Getting aggressive on the inflation front may also trigger inflationary pressures. Overall, disinflation is continuing, albeit at a slower and more uneven pace.
Jeffrey Roach, Chief Economist for LPL Financial says,” In the near term, inflation will run hotter than policy makers would like, so we expect the Fed to pause this month and possibly in March. However, by the time the Committee convenes in April and June, conditions will likely warrant another cut in rates. For now, the balance of risks tilts toward the weakening labor market. Hence, investors should brace for weaker payrolls and rising unemployment. My forecast for unemployment reaches 4.6% by the end of this quarter.”
The Trump Factor
Trump has been urging the Federal Reserve to lower interest rates, while his Justice Department has initiated a criminal investigation into Fed Chair Jerome Powell.
The Trump administration’s push for lower rates and aggressive legal tactics against Fed leaders may provoke backlash within the Fed’s policy committee. Powell and other Fed officials may be driven to defy Trump to uphold the central bank’s independence due to hardball tactics.