While the market expects a Fed pause, Powell’s tone and leadership uncertainty will drive Treasury futures, and dollar direction, creating short-term trading opportunities.
After three straight cuts, the Federal Reserve, led by Chair Jerome Powell, is widely expected to hold fire when it meets for the first time this year to discuss rates.
The rate-setting arm of the Fed, the Federal Open Market Committee (FOMC), will kick off a two-day meeting on Tuesday, and its verdict is due at 2 p.m. ET on Wednesday.
Shortly after, Powell will host a press briefing to explain away the rationale behind the decision and the likely interest rate trajectory. The January meeting will not be accompanied by the Summary of Economic Projections (SEP), which gives updated Fed forecasts for economic growth, inflation, jobless rate, and interest rates.
What Futures Traders Expect? The CME FedWatch Tool, which reflects futures trader expectations, shows a 97.2% probability that the Fed will hold rates unchanged at 3.50%–3.75%. The market assigns only a 2.8% chance of a quarter-point rate cut at this meeting.
Source: CME
What Strategists Expect:
- Morgan Stanley expects the Federal Reserve to deliver a “dovish hold,” citing recent stabilization in the labor market and solid activity levels. The firm’s Chief U.S. Economist Michael Gapen expects the central bank to upgrade its assessment of growth and remove the wording around rising downside risks to the labor market, while maintaining the “extent and timing of additional adjustments” language, implying continued easing bias. At the press conference, Morgan Stanley expects Powell to indicate that greater consensus has emerged within the committee that the economic outlook for 2026 is favorable. The firm also sees the Fed maintaining its policy of bill purchases to keep reserve balances at ample levels.
- JPMorgan Asset Management Chief Global Strategist David Kelly said there is a strong case for the Fed taking no action this time, citing the robust 5.4% growth suggested by the Atlanta Fed’s GDPNow modeling, the tight labor market due to the sharp drop in immigration last year, and the deceleration in inflation. Kelly braces for a near-unanimous decision in favor of a pause, potentially only Trump-appointed Fed Governor Stephen Miran dissenting.
Of the 12 FOMC members, only three either favor or lean toward follow-on rate cuts in 2026, while the remaining members either favor or lean toward a pause. Fed Leadership — Key Focal Point: With President Donald Trump making it clear that Powell’s term as the Fed chair won’t be extended beyond May, the spotlight is likely to be on his potential replacement. The Trump administration has been at odds with Powell ever since it took over in January 2025, calling him out for not easing enough. It even issued a subpoena to the Fed, alleging irregularities in the renovation of two Fed buildings.
Rumor has it that the president could name a new Fed chair as early as this week. According to the prediction market Kalshi, the odds currently favor BlackRock executive Rick Rieder as the most likely successor to Fed Chair Jerome Powell. Former Fed Governor Kevin Warsh has also emerged as a leading contender.
A dovish chair at the helm increases expectations for rate cuts this year, potentially exacerbating U.S. dollar weakness.
The dollar index has come under pressure, dropping to the lowest level since mid-September 2025.
Source: TradingView
Market Setup For Traders:
A dovish Fed hinting at rate cuts
- Perks up front-month rate futures, including two-year Treasury futures and Secured Overnight Financing Rate (SOFR) futures, and dollar-denominated commodities, making it prudent to go long on these derivative instruments; Shorting the U.S. Dollar Index futures may also be a profitable trade.
If Powell pours cold water on rate-cut expectations by highlighting the upside risks to inflation, the market could factor in fewer cuts this year.
- In such a scenario, short positions in rate futures and long positions in the U.S. Dollar Index futures may be a better trade.
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