Interest rate cut expectations face further pressure! Vice Chairman of the Federal Reserve emphasizes that interest rates are at an appropriate level.

Recently, the labor market data with strong resilience and the stickiness of inflation have significantly cooled down the market's expectations for a rate cut by the Federal Reserve. The latest speeches by Federal Reserve officials have released a collective hawkish stance, which has further dampened the expectations for a rate cut. The long-time mild hawkish stance of the Federal Reserve Vice Chairman Philip Jefferson indicates that the benchmark interest rate is already very close to a level that neither stimulates nor slows down the economy - meaning that in Jefferson's view, there is no urgency for a rate cut in 2026. He emphasized that this puts Federal Reserve officials in a favorable position to address the constantly changing economic risks. As several Federal Reserve officials expressed hawkish views on monetary policy for 2026, the theme of a "rate cut trade" has already begun to show signs of weakness. Since the release of multiple labor market statistics in December, combined with the latest published Producer Price Index (PPI) for November, Consumer Price Index (CPI) for December, which show a slow pace of inflation cooling in the US, and the latest retail sales data, which exceeded expectations, interest rate futures traders have continued to lower their expectations for a rate cut by the Federal Reserve in 2026. The "CME FedWatch Tool" shows that traders in the interest rate futures market have reduced their expectations for three rate cuts priced in at the end of 2025 to two rate cuts in 2026, and traders are generally betting on the first rate cut in June 2026, rather than the previously speculated March. However, the traders' expectations for a rate cut, as shown by the "CME FedWatch Tool," are still higher than the median expectation of Federal Reserve officials, who only anticipate one rate cut in 2026 according to the FOMC dot plot. Jefferson, in a speech prepared for an event held in Boca Raton, Florida on Friday, stated: "In my view, the current monetary policy stance allows us to determine whether and when to further adjust our policy rates based on upcoming data, changing economic outlook, and risk balance." Jefferson has joined a growing group of hawkish Federal Reserve officials who, after completing three rate cuts at the end of 2025, declared that the current benchmark interest rate set by the Federal Reserve is well-balanced for managing risks in non-farm employment and inflation. Only two policymakers - Federal Reserve Vice Chairman for Supervision Michelle Bowman and Trump-nominated Federal Reserve Board member Stephen Moore have stated that the Federal Reserve should not pause its rate cuts this month. Jefferson stated that recent pricing data for services and housing costs indicated that inflation is moving closer to the Fed's long-term target of 2%. Despite the rise in price inflation for goods, Jefferson said it is reasonable to expect that the price effects of tariffs will not last long. The Federal Reserve Vice Chairman also stated that despite increasing overall risks in the US labor market, he expects the unemployment rate to remain stable in 2026. In his latest speech, Jefferson also discussed the Fed's asset purchase resumption and the management of the Federal Reserve's $6.6 trillion balance sheet. He emphasized that the new asset purchase program aims to stabilize bank reserve levels and should not be seen by the market as an attempt to stimulate the economy. In a brief conversation with journalists after the speech, Jefferson briefly responded to the significant controversy surrounding the US Department of Justice issuing a criminal subpoena to Federal Reserve Chairman Jerome Powell, which is related to Powell's statement before Congress in June last year regarding the renovations at the Federal Reserve. Late on Sunday, Powell issued a rare statement, saying that this action was due to the Trump administration's opposition to Federal Reserve monetary policy decisions. "I have tremendous respect for Fed Chair Powell," Jefferson told reporters during a break in the conference. "I think he is a very honest and upright person." This week, concerns about the independence of the Federal Reserve's monetary policy have continued to escalate globally, with central bank governors from around the world voicing support for Fed Chair Powell, after the Trump administration threatened criminal prosecution against him. Undoubtedly, the Federal Reserve's decades of independence in monetary policy have faced an "unprecedented political assault." Federal Reserve Chair Jerome Powell stated that the US Department of Justice had issued a grand jury subpoena to the Fed, threatening criminal prosecution for Powell's testimony before Congress in June 2025 about ongoing renovations at the Fed headquarters. In a statement released on Sunday evening Eastern Time, Powell denied that the action was related to his testimony or the renovation project. "All of this is a pretext," Powell said in a statement posted on the Fed's official website. "The threat of criminal charges is because the Fed, in setting benchmark rates, makes professional judgments in the best interest of serving the American public, not following the preferences of the US president." Powell added in the statement, "This is about whether the Fed can continue to set rates based on real data and economic conditions - or if monetary policy will be determined in the future by political pressure or coercion."