Breaking Down the FOMC’s Expected Rate Decision 

The Federal Reserve is set to meet on Wednesday, January 29 at 23:00 GMT+4 where their latest interest rate decision will significantly impact financial markets, particularly the US Dollar.  

Traders and investors are closely monitoring potential outcomes and their effects. 

The Fed Funds rate stands between 4.25% and 4.5%, and markets are expecting the Fed to hold rates steady, despite President Trump’s recent calls for rate cuts. 

However, the President’s influence over the Fed’s decisions is limited, and the Fed has emphasized its independence in setting monetary policy. ⁽¹⁾ 

At the December FOMC meeting, the Fed cut rates by 25 basis points (bps), in line with expectations. However, they signaled a slower pace of easing for 2025, forecasting only 50 bps in total. This cautious approach reflects strong economic performance and persistent inflation, which reduces the urgency for aggressive rate cuts. 

Fed Chair Powell also noted that some projections took into account potential policy shifts under President Trump, whose economic plans focus on low taxes, deregulation, and protectionism, which could increase inflation through tariffs and labor shortages. ⁽²⁾ 

US Dollar Gains Support 

Despite a 25-bps rate cut in the Fed’s meeting in December, the US Dollar has rallied due to a less dovish Fed and safe-haven demand. The Fed’s December meeting minutes and recent speeches indicate a slower pace of easing in 2025.  ⁽³⁾ Trump’s policies, particularly on trade, can trigger volatility.  

Strong labor market conditions and economic resilience still support the US Dollar. US GDP data will be released on Thursday January 30 where the US economy is projected to grow by 2.7% in 2024. This robust growth, driven by stronger productivity and higher business investment, may lead the Fed to halt rate cuts sooner than expected, further supporting the US Dollar’s strength. ⁽⁴⁾ 

The Core PCE index, which is the Fed’s favorite inflation gauge, is expected to rise to 0.2% MoM.⁽⁵⁾ 

Uncertainties around trade policies still loom as expectations of high US tariffs on goods from countries like China, Canada and Mexico, as well as the Eurozone, has renewed concerns of a renewed bout of inflation, boosting Treasury yields and the US Dollar. ⁽⁶⁾ 

Ahead of the FOMC meeting, gold has been volatile due renewed strength in the USD and trade uncertainty. A stronger US Dollar tends to pressure gold as it makes the currency more valuable than others. Gold’s outlook remains uncertain as the Fed may keep rates on hold with geopolitical tension concerns on the rise. These factors may keep the precious metal highly volatile. ⁽⁷⁾ 

Conclusion 

Looking ahead, the Fed might be cautious about committing to further cuts without clear signs of economic cooling, such as slower job creation and reduced inflation. While rate cuts are still expected in 2025, the timing may shift as rising Treasury yields, a stronger dollar, and fiscal deficit concerns could affect economic activity.  

If the labor market data weakens and borrowing costs continue to rise, the Fed may need to act more decisively later in 2025, potentially exceeding market expectations for easing. 

Sources: ⁽¹⁾ ⁽³⁾ ⁽⁴⁾ ⁽⁶⁾ ⁽⁷⁾ Reuters, ⁽²⁾  ING , Acuity ⁽⁵⁾ 

The information provided is not intended to serve as investment advice or a sufficient basis for making investment decisions. It is meant solely for informational purposes.

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