Regarding the upcoming January FOMC meeting, market consensus overwhelmingly expects the Federal Reserve to hold interest rates steady at 3.50% - 3.75%. Faced with "sticky" inflation— the PCE index lingering around 3% —juxtaposed against a rising unemployment rate of 4.4% , the Fed is likely to opt for a "wait-and-see" approach in this January meeting. Policymakers wait for a clearer economic picture, after the significant data distortions caused by the record-long government shutdown late last year.
The DOJ’s criminal investigation into Chairman Jerome Powell has ignited intense debate over the Fed's independence amid White House political pressure. However, institutional safeguards suggest that the Fed’s autonomy remains intact. Should Powell elect to remain on the Board of Governors after his chairmanship concludes, combined with the scheduled rotation of FOMC voting members, the council is expected to see an influx of hawkish voices.
Furthermore, with the potential appointment of a new Chair, the seat for Stephen Miran, and a replacement for Lisa Cook, the Trump administration may find it difficult to compel the Fed into aggressive rate cuts this year. While easing is on the horizon, it will likely be measured rather than drastic. Stable inflation expectations in both the short and long term indicate that markets remain unperturbed by concerns over central bank independence.
While the probability of an immediate or aggressive cut remains low , external catalysts may soon force the Fed’s hand toward Quantitative Easing (QE). The primary trigger is the precipitous decline of the Japanese Yen.
Superficially, the Yen’s weakness is a domestic crisis for Tokyo, fueling cost-push inflation via soaring import prices. However, if Japan is forced to defend its currency alone, it must sell USD to buy JPY. Given that the lion's share of Japan's reserves is held in U.S. Treasuries, this necessitates a massive liquidation of American debt. Such a move would spike U.S. Treasury yields, escalating debt-servicing costs—a scenario that President Trump and Treasury Secretary Bessent are determined to prevent at all costs. This underpins the narrative of a coordinated Fed-BoJ intervention to rescue the Yen.
As previously analyzed, this rescue operation could escalate through three distinct tiers. Currently, signaling maneuvers such as "rate checks" remain relatively effective, exerting downward pressure on the USD and bolstering the JPY. However, should these signal interventions lose their potency, the Fed may be compelled to take direct action.
The most predictable maneuver would be the implementation of QE to repurchase Treasuries—effectively injecting liquidity into the system—either buy directly from Japan or through the open market to neutralize Japanese selling. Ultimately, the objective is to weaken the USD by any means necessary to support the Yen and maintain global bond market stability.