FED: January FOMC: Keeping Rate Cut Hope Alive

Recapping the outlook for today's Fed decision (preview here): After easing by 25bp at the December meeting (to a Fed funds rate range of 4.25-4.50%), the Fed hinted strongly that it would keep rates on hold at January as it assessed the landscape after delivering 100bp of cuts. 

• Taking the FOMC's latest rate guidance at face value: they are assessing the "extent" and "pace" at which future adjustments are to be made, but by the same token, they do not outright promise further cuts. The data has cooperated with the patient approach: after nonfarm payrolls came in stronger than expected almost across the board, the CPI report mid-month was a little softer than expected.
• With minimal Statement changes expected and no new rate/macro projections (indeed the data since the December projections aren’t cause for any revisions anyway), the focus will be on Chair Powell’s press conference. We expect Powell to repeat the same themes heard six weeks earlier, with the following re-delivered verbatim:
  • “We know that reducing policy restraint too fast or too much could hinder progress on inflation. At the same time, reducing policy restraint too slowly or too little could unduly weaken economic activity and employment. In considering the extent and timing of additional adjustments to the target range for the federal funds rate, the Committee will assess incoming data, the evolving outlook, and the balance of risks. We’re not on any preset course.”
• This should be a “neutral” meeting but the setup is for  market reaction to lean slightly dovish in the context of only one more full rate cut being priced for the cycle and not until June.
• While he won’t be able to add any additional commentary on the Fed’s response to prospective fiscal/trade/immigration policy shifts, we suspect Powell will remain optimistic on the inflation trajectory and reiterate that 50bp of cuts remain the FOMC’s baseline scenario this year. In other words, the bias toward easing remains intact – though uncertainty remains high.
• Powell probably won’t completely rule out another cut as soon as the next meeting in March.
• Additionally, the FOMC is due to begin discussing its 5-year framework review at this meeting though only in preliminary fashion, while we would not be surprised if there were also initial discussions over balance sheet policy in 2025 (though serious decisions on halting QT will probably not be mulled until at least March or May.