The Fed Isn’t Moving This Week — But the Market Should Pay Attention

• Policymakers are expected to leave rates unchanged in a range of 3.50 to 3.75%

• Rate cuts could be on hold until a new chair takes over in June.

• Real rates based on PCE imply a 100 basis point cushion.

This week’s Federal Reserve decision won’t move markets, but the clues buried around it will…

The Fed heads into this week’s monetary policy announcement with a stance that blends confidence and restraint. Not the panicked caution of a central bank that thinks it’s behind the curve, and not the chest‑out swagger of a Fed ready to declare victory. Its compass sits squarely in the middle.

That middle ground has been shaped by a chorus of policymakers who’ve been sketching the same broad outline: inflation cooling, the labor market easing without unraveling, and the growing likelihood that rate cuts later this year aren’t a matter of if but when.

On Wednesday, Chairman Jerome Powell is expected to confirm that the Federal Open Market Committee will leave the federal funds target at 3.50% to 3.75%. But the headline isn’t the point. The real signal will come from the color around future policy. Wall Street will want to hear how Powell frames the path toward easing. That will imply what growth looks like in the year ahead.

And while the financial media may try to spin the outcome as a hawkish tilt, don’t buy it. Despite the noise around leadership changes and internal reshuffling, policymakers continue to see the economy drifting back toward pre‑pandemic norms. They also know they’ve built a meaningful cushion to support the economy again if needed. That’s why the Fed is likely to reinforce that rate cuts later this year remain on the table. That message will help anchor a steady rally in the S&P 500 Index.

But don’t take my word for it, let’s look at what policymakers are telling us…

Powell has been the clearest about the Fed’s risk map. He keeps pointing to a labor market that’s softened meaningfully, easing wage pressure, and a general sense that the post‑pandemic heat has finally bled out. Inflation is still above target, but the direction is lower. Powell’s argument relies heavily on the assumption that tariffs will result in a transitory one-time increase in the price level, rather than a durable change in the inflation regime. It signals that the Fed won’t overreact to noise or chase temporary distortions. His message is steady: policy is still restrictive, the stance is doing its job, and the Fed has room to respond once the data confirms the trend.

Federal Reserve Bank of Philadelphia President Anna Paulson’s tone is more measured, but her conclusions rhyme with Powell’s. She describes the outlook as “pretty benign,” which is her way of saying the inflation path is moving toward 2% without the economy cracking. She sees policy as “a little restrictive,” enough to keep price easing on track. And she’s been explicit that if inflation keeps drifting lower and the labor market holds its footing, modest rate cuts later this year would be appropriate. Her “bending, not breaking” framing is a quiet but important signal that the system is absorbing the pace of policy adjustments.

Governor Christopher Waller, meanwhile, has been the most direct. He expects inflation to continue slowing over the next several months and dismisses tariff‑related bumps as temporary. With expectations anchored and labor demand cooling, he sees no reason to keep rates pinned at restrictive levels longer than necessary. He’s been clear that the Fed can move policy closer to neutral (neither hurts nor helps the economy) as long as inflation keeps moving lower. In his view, the path to cuts is conditional, but increasingly visible.

We can see why when we observe real interest rates (the effective federal funds rate minus inflation). According to the latest Personal Consumption Expenditures data, the Fed currently has a rate cut cushion of 100 basis points. And if we consider the fact that it has managed the rate to roughly -0.2% since 2000, it implies there’s added room for easing.

The synthesis across these policymakers is straightforward: the Fed isn’t rushing, but the direction of travel is set. Inflation is decelerating for reasons that make sense—slower hiring, fading tariff effects, and a policy stance that’s been restrictive long enough to bite. The labor market is softening in a controlled, almost engineered way. And the leadership is converging around the idea that the next meaningful move is down.

The hinge is timing. Powell’s caution reflects institutional memory. Paulson’s conditional optimism reflects a data‑first posture. Waller’s confidence reflects his read of the cycle. Blend them, and the message is clear: if inflation keeps cooling through spring and early summer, the probability of rate cuts later this year rises sharply.

This week’s “unchanged” decision isn’t the headline. The path forward is. And right now, the glide path is tilting toward easing—slowly, deliberately, and increasingly in unison. That should underpin a steady, long-term rally in the stock market.

Five Stories Moving the Market:

Japan’s Vice Finance Minister for International Affairs Atsushi Mimura said authorities in Tokyo will respond to movements in the foreign exchange market appropriately as needed in close coordination with their counterparts in Washington; in September the Japanese government said it would intervene to deal with excess volatility or disorderly movements in the currency market – Bloomberg. (Why you should care – intervention could help to stabilize the yen and Japanese bond yields)

U.S. President Donald Trump said he would impose a 100% tariff on Canada if it follows through on a trade deal with China and warned Canadian Prime Minister Mark Carney that a deal would endanger his country – Reuters. (Why you should care – the White House is likely trying to get Canada to come back to the negotiating table)

Senate Republican leaders plan to reject Democratic demands to split off funding for the Department of Homeland Security and pass the rest of a giant funding package needed to avert a partial government shutdown this week – WSJ. (Why you should care – the two sides must agree on a funding deal by the Saturday to avoid another government shutdown)

Rick Rieder’s Wall Street credentials and openness to making changes at the Federal Reserve have bolstered his candidacy for the central bank’s top job; the BlackRock executive is said to have grabbed President Donald Trump’s attention with his myriad of ideas for overhauling the Fed – Bloomberg. (Why you should care – Rieder’s lack of having worked at the central bank is likely appealing to both Wall Street and the White House)

Samsung Electronics to start production of its next-generation high-bandwidth memory chips, or HBM4, ​next month and supply them to Nvidia; Samsung has been trying to catch up with cross-town rival SK Hynix, a primary supplier for advanced memory chips crucial for Nvidia's AI accelerators – Reuters. (Why you should care – high bandwidth memory demand continues to outstrip supply)

Economic Calendar:

Earnings: BKR

Australia – Australia Day (Holiday)

Japan – Leading index for November

Japan – Leading index (MoM) for November

Eurozone – German Ifo Business Climate Index for January (4 a.m.)

ECB’s Nagel (Germany) Speaks (6 a.m.)

U.S. – Chicago Fed National Activity Index for November (8:30 a.m.)

U.S. – Durable Goods Orders for November (8:30 a.m.)

ECB’s Nagel (Germany) Speaks (8:30 a.m.)

U.S. – Dallas Fed Manufacturing Index for January (10:30 a.m.)

Treasury Auctions $89 Billion in 13-Week Bills (11:30 a.m.)

Treasury Auctions $77 Billion in 26-Week Bills (11:30 a.m.)

Treasury Auctions $69 Billion in 2-Year Notes (1 p.m.)