Both the data and Chair Powell’s robust defence of central bank independence indicate little prospect of a 28 January Fed rate cut. The key question is, can the President’s pick for Chair convince the rest of the committee that further action will be needed.

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President’s pick overshadows Chair Powell

Wednesday’s FOMC meeting is very likely to see monetary policy left unchanged after 75bp of interest rate cuts spread over the previous three meetings. The fact that growth is strong, unemployment is low, equity markets are close to all-time highs and inflation is above target all argue for a pause. Fed Chair Jerome Powell’s robust defence of the central bank’s independence on 11 January, in response to ongoing pressure from the President to lower rates, confirms it. There will be dissent, but it will likely be restricted to arch-dove Stephen Miran and Chris Waller, who remains in the mix as the prospective next Fed Chair.

With just 1bp of a potential 25bp cut priced and only 8bp priced by the March FOMC meeting, the press conference will likely be of little market consequence. The focus will be on President Trump’s imminent nomination for the new Fed Chair, the upcoming data, and whether that person can corral the rest of the committee into further cuts.

Further Fed rate cuts remain likely

Our house view has been that the Fed will cut rates at the March and June FOMC meetings, but the clear risk is that will be delayed by perhaps three months. To deliver a March rate cut, the Fed’s dual mandate will need to come under additional pressure, quickly. The tariff impact on inflation has been more muted than expected and the post-government shutdown numbers provided clear downside surprises, but it would probably require two consecutive drops in employment at the January and February jobs reports to get a majority of members backing it.

Nonetheless, we do still have a conviction view of two further rate cuts with the risks skewed in favour of additional action rather than fewer cuts. Monetary policy is still slightly restrictive and although the growth story is firm, we expect the Fed to be in a position to move policy to a neutral setting given the risks that the jobs data continue to lose momentum.

Federal government worker lay-offs resulted in non-farm payrolls falling 173,000 in September. There were gains in November and December of 56k and 50k respectively, but Chair Jerome Powell’s assertion that the Bureau for Labor Statistics is likely overstating jobs growth by around 60k per month means effectively that employment has stalled. Moreover, outside the government, leisure & hospitality and private education & healthcare services sectors, the US economy has lost jobs in seven of the past eight months.

Fed funds target rate upper band (%)

Source: Macrobond, ING

Concentration risk

The K-shaped story also hints at vulnerabilities. The top 20% of households by income continue to spend strongly, boosted by high incomes and soaring wealth, while the bottom 60% are struggling as concerns about job security and the potential for tariff-induced price hikes sap sentiment. Similarly, in the corporate sector, business capex outside of tech has contracted for four quarters in a row. But investment in computing and software is up 19% year-on-year, which means overall business capex continues to rise.

The concentration of growth in relatively small, but fast-growing sectors signals that, from a risk management perspective, it makes sense to get policy to neutral until there starts to be strength in breadth.

Delayed inflation data confirms that tariffs are not having the immediate impact on prices that most feared. That is not to say we can’t rule out that it leads to higher prices eventually. But the fact it is coming through so slowly gives more opportunity for falling energy costs, slowing housing rents and weaker wage growth to mitigate and allow inflation to continue trending down towards 2%. This will give the Fed greater scope to act.

The Fed will see positives coming from the bills-buying programme so far

Since the Fed re-ignited its bills-buying programme, some $65bn has been added. Total bills holdings are now at almost $260bn. Over the same period, some $20bn of MBS has rolled off the balance sheet. Latest data also show a rise in government bond holdings. All in all, in net terms, there has been a $55bn build in the Fed’s holdings of securities since mid-December 2025. That has been partly offset by a rise in the Treasury cash balance through tax inflows. It leaves bank reserves at around $3tr.

And, importantly, repo conditions have calmed. The Fed will be happy with this outcome, as the genesis of the renewed bills-buying programme has been to calm the perception of liquidity tightness that had emerged. That said, the effective fed funds rate remains elevated relative to where it was. It had been 8bp above the fund rate floor. It’s now 14bp above. That may not seem like much, but it is an irritation for the Fed. In fact, it was this drift higher that really prompted the Fed into bills-buying-action. Ideally, the Fed would like to see the effective fund rate drift lower again.

As it is, the effective funds rate is just 1bp below the rate paid on excess reserves, which in fact should act as a ceiling for the effective funds rate. The Fed will still likely declare recent developments as positive, and there has certainly been a net calming repo circumstances. Likely, no further action will be required in this space at this juncture. The policy will remain one of building the bills holdings while reducing the MPS holdings, and keep the government bond holdings broadly as is (total Fed holdings are currently $6.2tr, a little over half of which is in government bonds).

Fed could provide the dollar a little support

Wednesday’s FOMC meeting could provide the dollar with a little support as Fed Chair Jerome Powell tries to explain the pause. Given the recent performance of both US asset markets and activity, he will struggle to argue that financial conditions are restrictive and need to be loosened. This could pour cold water on the notion of a second Fed rate cut and this would lift the dollar against the low yielders like the yen and the euro. Instead, the next macro leg lower in the dollar will likely have to emerge from poor data rather than Fed-speak.

This Fed meeting comes at a time when the dollar is a little offered. We are not big fans of the story of capital exodus from the US for geopolitical reasons. But strong portfolio flows into emerging markets – typically from USD accounts – are a key theme weighing on the dollar. A Fed going slow on easier policy could dent some of those flows at a time when positioning is getting quite extreme. In all, we favour EUR/USD bouncing around in a 1.16-18 range through February, while a less dovish Fed could be one more catalyst for USD/JPY to trade through 160.

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