Federal Reserve Set to Pause Rate Cuts Despite White House Pressure

2026-01-25 economy

Washington, Sunday, 25 January 2026.
Markets price in a 97% chance the Fed will hold rates steady Wednesday, defying President Trump’s calls for cuts as the central bank defends its independence against political pressure.

A Collision of Policy and Politics

As the Federal Open Market Committee (FOMC) prepares to conclude its two-day meeting this Wednesday, financial markets have effectively ruled out a rate cut, defying direct pressure from the White House. Traders are currently pricing in a 97% probability that the central bank will hold the federal funds rate steady [3], leaving it within the target range of 3.50% to 3.75% [3]. This anticipated pause follows a period of consistent easing, during which the Fed lowered rates by 0.25 percentage points at each of its final three meetings in 2025 [1]. While the administration has intensified its scrutiny—evidenced by a Department of Justice investigation into Chair Jerome Powell [3]—the central bank appears poised to assert its autonomy. Powell, who staunchly defended the Fed’s independence earlier this month [2], is expected to lead a committee that prioritizes economic data over political demands, though economists at Nomura forecast there may be one dissent in favor of a cut [3].

Economic Fundamentals Justify the Pause

The economic rationale for a policy hold is rooted in the resilience of the labor market and the persistence of inflation. Despite political calls for cheaper borrowing costs, the unemployment rate fell to 4.4% in December 2025, down from a revised 4.5% the previous month [4], suggesting that the job market remains robust enough to withstand current rate levels. Furthermore, the Fed’s preferred inflation gauge, the Core Personal Consumption Expenditures (PCE) index, remained at 2.8% in November, notably above the central bank’s target [4]. According to Oxford Economics, the current federal funds rate is close to neutral, meaning it is neither stimulating nor restricting the economy aggressively, which reduces the immediate urgency for further cuts [1]. Consequently, BofA Securities predicts the meeting will be a “steady” affair with no major surprises, reinforcing the existing policy stance rather than pivoting [7].

Corporate Earnings Carry the Torch

While the macroeconomic backdrop remains complex, corporate performance is providing a critical counterbalance for investor sentiment. As of Thursday, January 22, 81% of the 59 S&P 500 companies that had reported earnings beat estimates [1]. Looking at the broader picture, S&P 500 earnings are projected to have climbed 9.1% in the fourth quarter of 2025 compared to the prior year [1]. This earnings growth is essential to support current market valuations; the S&P 500 is trading at over 22 times expected earnings, a premium of approximately 38.365% above its long-term average of 15.9 [1]. Investment in Artificial Intelligence remains a dominant theme, with market participants looking for confirmation that massive capital expenditures in AI infrastructure are translating into tangible profits [1].

Geopolitical Headwinds Persist

Beyond domestic policy and profits, investors are navigating a volatile geopolitical landscape that threatens to disrupt the economic outlook. Recent tensions surrounding President Trump’s interest in acquiring Greenland sparked fears of a trade war with Europe, causing temporary market declines before tariff threats were eased [1]. These events have reverberated through currency markets, where the U.S. dollar has softened amidst the uncertainty [5]. While Chris Galipeau of Franklin Templeton suggests that markets can get “sidetracked” by such geopolitical headlines, he maintains that corporate earnings remain the ultimate driver of market performance [1]. Nevertheless, with global peers in Brazil, Canada, and Sweden also poised to retain current interest rate settings [6], the synchronized global monetary pause highlights a cautious approach by central bankers worldwide.

Sources

Federal Reserve Corporate Earnings