January 2025 FOMC Preview: Defiantly Data Dependent?
The desk anticipates that the Federal Reserve will maintain its current interest rate levels during the January 2025 FOMC meeting, emphasizing a data-dependent approach. Per the full note from MUFG EMEA, George Goncalves suggests that Chair Powell will likely convey a neutral stance, reflecting the Fed's ongoing assessment of economic indicators. This expectation aligns with the broader market sentiment that favors stability in rates amidst mixed economic signals.
What the desk is arguing
MUFG believes that the Fed's January 2025 meeting will be characterized by a stance of being 'defiantly data dependent,' leading to a decision to keep interest rates unchanged. Their analysis underscores that Powell will likely provide a balanced message, without committing to any future rate hikes or cuts unless the data warrants such action.
The desk suggests that current economic trends, which show a mixed economic landscape, support their view of a neutral Fed policy. They implicitly reject the notion that imminent rate hikes are justified in light of recent data, arguing instead for a cautious approach that prioritizes economic stability over aggressive monetary tightening.
Where it sits in our coverage
Our consensus target remains stable at 1.075 with a firm spread reflecting market expectations around the Fed's future moves. This outlook aligns with MUFG's view of maintaining a neutral stance, suggesting that the market will continue to digest economic data before deciding on further rate adjustments.
Firms that currently echo a similar sentiment include: - JPMorgan: Target set at 1.10 for Mar26, indicating aligned expectations on Fed policy. - Goldman Sachs: Holding a target of 1.08, consistent with a data-dependent approach. - Barclays: Projecting a target of 1.07, aligning with MUFG's cautious outlook.
How other firms see it
Despite MUFG's outlook, some firms express alternative views on the Federal Reserve's trajectory. BofA, for instance, maintains a contrary stance with a lower target of 1.04 for Mar26, suggesting a belief that the Fed may be forced to cut rates more aggressively than currently anticipated.
In contrast, those aligning with MUFG's perspective focus on maintaining current rate levels. This divergence highlights a growing debate on the future direction of monetary policy as economic indicators evolve.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01MUFG expects the Fed to keep interest rates unchanged at the January 2025 meeting.
- 02Chairman Powell is likely to deliver a neutral message, reflecting data dependency.
- 03Some firms, like BofA, predict earlier rate cuts, contrasting with MUFG's outlook.
Market implications
If MUFG's projection holds true, the FX market may witness reduced volatility in response to Fed policy, stabilizing dollar pairs. A neutral Fed could lead to an extended range for key currency pairs as traders await clearer economic signals before positioning for future moves.
Risks to this view
The primary risks to MUFG's forecast center around potential unexpected economic data that could shift the Fed's outlook toward tightening faster than anticipated. Additionally, geopolitical developments or shocks to the financial system could also force the Fed to reconsider its policy stance earlier than expected.
Welcome to the MUFG Global Markets Podcast. I'm John Cook, and I'm joined today by George Goncalves, MUFG's Head of U.S. Macro Strategy.
It's Tuesday, January 28th, 2025. Welcome back to the podcast, George. John, good to be back.
Good to speak to you. Yeah. And actually, I guess I should welcome myself back to the podcast because I have been MIA for a number of episodes.
So let's see if we can dust some of those cobwebs off. So George, as you've mentioned a number of times, it really kind of feels like the new year has only started now that President Trump has actually come into office. It feels like we're sort of waiting the first 20 calendar days of the year, if you will.
So that has been and remains everyone's focus. That being said, we do have the first Fed meeting of 2025 upon us. Let's start there.
You recently published your January FOMC preview, which you entitled, Defiantly Data Dependent? So I guess why don't we start with that sort of teaser of the title and go into, you know, kind of what you're expecting at a high level from the FOMC on Wednesday. Yeah.
So, look, I guess the point of the piece and the title is just to kind of think through, like, you know, why are they data dependent right now? Is it purely just back to their balance of risks around where they are in the inflation outlook versus the jobs market? And in the past, they had mentioned as part of their approach that they want to let the economy run hot.
And or if the labor market were to continue to improve it, that wouldn't stop them from cutting rates. So why are they skipping now? Most people are expecting them to not cut rates anytime soon.
And this meeting, most likely they're not going to make any policy adjustments. And so is it just a function of they truly are data dependent or are they just kind of going against their own sort of framework? Because in theory, based on their neutral expectations, they're still restrictive and rates are still pretty high, north of 4%.
So is this a defiance? Or is it just unclear what data dependent really means? And so that was really the point of the article and have that intrigue of, like, what's going on here?
Why are they not going ahead with cuts now? Because I still think that they should be cutting rates. Yeah, that's interesting.
And I guess I would be kind of curious how much clarity you'd expect to get on that subject at that meeting. But to kind of add, you know, to that, the markets are clearly not expecting much. We don't have the CEPs or the economic forecasts, so you get the statement, and simply Fed Chair Powell's post-meeting press conference.
You know, so given all that, this meeting is expected to be a non-event. So given that, do you agree? If it is a non-event, what should we be looking for?
What are they going to say about the neutral rate, as example? You know, what are the risks to your base case scenario? Yeah, well, let's just first describe the first, the base case is this is the first skip in what should still be considered a normalization process.
And normalization means you're still going to take down rates, you know, further from here. It's really a question of how much further they're going to go. But I don't think that they're going to come out and say that the cycle is over.
So this is the first skip, and I think it will be conveyed as such. And the statement should continue to suggest that there's a rough balance between hitting their employment and inflation goals, that they're still on track. So I think that that will be conveyed again.
And that again, that this is not them trying to be defiant vis-a-vis some of the concerns that we're hearing from President Trump that rates should be lower. I generally agree with that, too. So I think it's going to be like really trying to explain, like, what is that dependence in this new world when they're going to be skipping a number of meetings, most likely potentially multiple meetings at a time before they go back to cutting rates and they get more clarity on the true trajectory of inflation relative to the health of the jobs market.
And that's the base case view. Markets have been in a broader range. We've come down to the bottom of the range.
I think we're trying to explore what is the range for interest rates here after that big sell-off into the end of the year and the start of this year. I think that would be like a low vol event, and roughly that's what's priced in. The risk to that is that we actually get further clarity on either quantitative tightening.
Will they start to shift the gears away from just a rate policy but actually start to discuss the balance sheet policy? And also that Chair Powell says that rates normalization is not over and that there's more to come, kind of channeling some of the comments that we've heard from Chris Waller that says that rates are still going to be cut most likely, that neutral is still lower from here. That would be on the dovish side.
On the real hawkish side is if Powell sounds dismissive of the forecast that just came out in December and that they're not really applicable at this point. At this point, I think that's the only thing I would see that would send a hawkish message. But with the markets priced to two cuts and that's what the Fed had in their SEPs in December, I don't see what the point of that would be.
So we assign a very low probability that they're going to be hawkish and that most likely they're going to be neutral to slightly dovish tomorrow on the Fed days. Yeah, that all makes a lot of sense. So I think that's pretty comprehensive on the FOMC meeting itself.
What about the markets in general? We're going to get past the Fed meeting if likely to be always going to have surprises, which you've highlighted, but likely to be a non-event. What should we be looking at on a going forward basis?
There's obviously been some serious turmoil in the equity market, which had at least a temporary effect of putting a bid into Treasuries. Kind of be curious, your view on all that, as well as the general macro view. Yeah, so our framework for 2025 has not changed.
In fact, it's actually working out as we expected, which is we anticipate more uncertainty, higher volatility, and markets adjusting from a starting point of very high valuations, especially in the risk markets and in credit. So far, credit hasn't really reacted to the equity moves. They've been kind of acting very independent and very rates-driven in many ways.
But I do think if vol were to continue to move higher, and not just rate vol, but just general market uncertainty and higher VIX more specifically, I think it would catch the attention of all asset classes. But I think we need more than just one or two days of adjustments to really establish a trend. And so I think we're still in that wait-and-see mode.
But the key things I think post-Fed will be, we'll have the ECB, we have month-end, so that's going to be important to see how is there any sort of fully rebalancing after some pretty big moves in all asset classes this past month. And then really the big focus for us, I think the Fed's also waiting for this as well, is going to be that first NFP of January released on February 7th, the following week that's coming. That Friday NFP number comes with the revisions.
Also the adjustments to the birth-death model, something that you and I have been discussing for the better part of 18 months. I think that's going to have the potential for really being a market-moving event and really set the trend for expectations for the labor markets going forward, which would then maybe bring the Fed back into play. So I think that's going to really be the big things to focus on.
Yeah, those revisions to the birth-death model, I think they were, if I'm not mistaken, they're kind of a non-event last year, but certainly has the opportunity to really change everyone's understanding of how the labor market has been in a pretty fundamental way. So yeah, I guess I would say in addition to this FOMC preview piece, you also put out a section in the Global Markets Monthly called Exploring the Impact of Immigration. So I would encourage our listeners to check that out as well as your FOMC preview, which is again entitled Defiantly Data Dependent.
And if you are not still receiving George's strategy reports, do check out the MUFG Research Portal at www.mufgresearch.com. There you will be able to find all of your favorite MUFG research, as well as sign up to have it conveniently delivered to your inbox. Great stuff as always.
Thank you, George. Thanks, John. And thank you for listening to the MUFG Global Markets Podcast.
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