When Federal Reserve officials meet on Jan. 29, the headline news may not be what they do with interest rates but whether they will prepare markets for the resumption of interest rate cuts.
The nation’s central bank likely will leave the federal funds rate unchanged at the current range of 4.25–4.5 percent, according to the CME’s FedWatch tool, which provides the probability of changes in this critical monetary policy instrument.
The rise in the probability of keeping interest rates at the current level reflects better economic news on the inflation front earlier in January that revived the narrative of the Federal Reserve’s resuming its interest rate-cutting course.
For instance, the Producer Price Index, a measure of inflation at the wholesale level, released on Jan. 14, showed that prices in December 2024 rose half as much as in November and below market forecasts.
Likewise, the closely followed core Consumer Price Index, which measures inflation at the retail level, and excludes the volatile food and energy component from the calculations, eased in December and is also below market forecasts.
The FedWatch tool is fairly accurate in the short run, as the Fed rarely goes against it. Thus, there likely will be no surprise news to move markets on Jan. 29 at 2 p.m., when the policymaking Federal Open Market Committee (FOMC) announces its interest rate target.
However, the surprise news will be what the FOMC says about the risks of the economy moving away from a performance that meets its dual mandate of price stability and maximum employment. This will set the stage for interest rate moves in future meetings.
According to the FedWatch, as of 1 p.m. on Jan 27, the likelihood of cutting interest rates to a range of 4–4.25 percent rises to 32.2 percent for the March meeting and 41.9 percent for the May meeting.
However, these probabilities could rise for several reasons, helping the Fed make the case for resuming interest-rate cuts in the March or May meetings. One of those reasons is falling oil prices, as President Donald Trump is following through with his campaign pledge to take policies that expand oil supplies and drive prices lower.
Another reason is the growing expectation that Trump will slowly impose tariffs on imported products, as lower interest rates could minimize their impact on consumer prices.
These factors suggest that consumer spending, a critical driver of U.S. economic growth, is ebbing, cooling off price pressures.
“Talks of inflation and worries about daily household costs may be holding back consumer expectations—particularly [for] those living on a paycheck-to-paycheck basis,” Bret Kenwell, a U.S. investment analyst at eToro, told The Epoch Times.
Alejandro Zambrano, ThinkMarket’s chief market analyst, provided further insight into the macroeconomic environment the FOMC will face when it meets this week.
“With the FOMC rate meeting set for Jan. 29, all eyes are on the Fed, but the market is confident that rates will hold steady in the 425–450 basis-points range,” he told The Epoch Times via email.
“The rationale is straightforward: U.S. GDP is cruising at 3.1 percent, inflation is holding high at 2.9 percent, and the unemployment rate is flirting with multiyear lows at 4.1 percent. Moreover, the labor market’s pulse is strong, suggesting more room for improvement.”
However, Zambrano said he is concerned that Trump will double down on his economic playbook. He has already started cutting red tape, slashing taxes, and proposing tariffs on key trading partners, such as Mexico and Canada.
“The latter plays a significant role in supplying energy to northern states,” he added. “If these trade wars turn ugly, inflation could shoot through the roof. So, for now, the Fed is in a wait-and-see mode, but if inflation breaks past 3 percent, the talk will move toward rate increases instead of rate cuts.”
