Nomura Policy Watch: January FOMC Preview

Nomura expects the Federal Reserve to maintain the federal funds rate at its upcoming January FOMC meeting. Forward guidance is likely to signal that the bar for future rate cuts remains elevated. Nomura anticipates a dovish dissent from Governor Miran, while Governor Bowman may also dissent. Fed Chair Jerome Powell is expected to reiterate that monetary policy is well-positioned and that the current rate sits within a reasonable range of the neutral rate. He will likely avoid giving explicit signals regarding the timing of future cuts.

Data released since the December meeting has skewed slightly hawkish. However, dovish and centrist officials are unlikely to completely rule out near-term rate reductions. Nomura expects Powell to deflect questions regarding the Department of Justice investigation into his congressional testimony and the Supreme Court debate involving Governor Cook.

Underlying economic data presents a mixed picture. The labor market showed improvement, with unemployment dropping to 4.4% in December and employment breadth expanding. Inflation data remains nuanced; core CPI rose modestly, but underlying details suggest PCE inflation could remain somewhat elevated. Cyclical spending remains robust, supported by stronger-than-expected retail sales, business investment, and housing data. Nomura currently tracks Q4 GDP growth at 3.7%. Productivity dynamics have emerged as a key focus. While dovish officials argue that strong productivity supports further easing, Nomura believes the policy implications are ambiguous. Ultimately, Nomura maintains its baseline forecast for no rate cuts during Powell's remaining term, followed by 25 basis point cuts in June and September.