The Federal Reserve's pause in cutting interest rates is almost certain. Powell is still caught in a political storm.

On Tuesday, the Federal Reserve will hold a Federal Open Market Committee (FOMC) meeting in Eastern Time. Market expectations are generally that the Fed will pause its rate-cutting cycle. With the job market stabilizing and the deepening internal divisions gradually healing over the past few months, the Fed's decision-making body has regained some consensus. Several individuals, including some closely connected to the Chair, have signaled that after three consecutive rate cuts, the current interest rate level is appropriate to support employment and continue to put downward pressure on inflation. "In essence, they are now in the 'good spot' of the neutral estimate," said Josh Hirt, senior US economist at Vanguard. "This has brought more caution and reduced the urgency for further rate cuts." This meeting provides Fed Chair Jerome Powell with an opportunity to shift public attention away from the political and legal vortex surrounding the Fed, back to the core mission of controlling inflation and maximizing employment. However, any respite may be temporary. The expected decision to keep rates unchanged is likely to exacerbate President Donald Trump's anger, who advocates for significant rate cuts. The FOMC's statement is scheduled to be released on Wednesday at 2 pm Washington time, followed by a press conference by Powell at 2:30 pm. This speech will be carefully scrutinized for clues on how long the Fed will stay put, what factors may tilt the balance and support rate cuts, and whether Powell has other plans in his ongoing battle with Trump. "No longer urgent" Economically, the latest data dynamics have helped ease tensions within the FOMC that have been causing internal divisions for the past few months. The sharp slowdown in hiring activities had raised concerns among officials who were worried that the labor market was nearing a tipping point. Another camp remained vigilant on inflation and strongly opposed rate cuts after each cut. By December, Powell was facing an "uprising," with as many as eight regional Fed presidents holding opposing views. The data gap resulting from the government shutdown further exacerbated these divisions. Recent data has slightly cooled down this debate. The year-over-year core consumer price inflation rate was 2.6% by December, lower than expected, soothing the nerves of policy hawks. On the employment front, the unemployment rate, which had risen to a four-year high of 4.5% in November, has since slightly fallen. Other labor market indicators are also reassuring, with no signs of a wave of layoffs, despite ongoing weak hiring activities. "Overall, the situation is not urgent, and the Fed does not need to take any policy action," said Yelena Shulyatyeve, senior US economist at the World Large Enterprises Association. While her concerns about employment are still greater than inflation, she currently sees the labor market in a "fragile balance" state, with job growth concentrated in a few industries. Wall Street expectations shifting Investors in the $30 trillion US Treasury bond market are preparing for rates to stay lower for longer. Forward contracts show that the market currently expects the next rate cut to occur in July, with the possibility of another cut by year-end. Wall Street analysts have pushed back their expectations for rate cuts in 2026 to the second half, with JPMorgan completely abandoning its predictions for rate cuts this year. "There is currently no compelling evidence that the Fed needs to take any substantive action," said Gregory Falarone, head of US interest rate trading and strategy at AmeriVet Securities. "They will likely stand pat in the short term." Not all policymakers have calmed down. Fed Governor Stephen Miller has called for a 150 basis point rate cut this year, currently on unpaid leave as a senior advisor to Trump. Vice Chair Michelle Bowman, who oversees regulatory affairs, has suggested that officials should avoid signaling a pause in the easing cycle. However, these two seem to be somewhat isolated. Other policymakers who have spoken since the December meeting seem satisfied with the current interest rate situation, including New York Fed President John Williams, whose views are believed to align with Powell's. Beyond the post-meeting press conference, Powell has not publicly indicated his policy views since October 14. Even, Federal Reserve Governor Christopher Waller, who first advocated for rate cuts as early as June last year, has moderated his tone. "Because inflation remains elevated, we can take it slow," he said on December 17, a week after the last meeting. The political storm of "extraordinary times" Despite nearly restoring harmony internally, external pressure remains immense. Powell's press conference after the meeting will be his first public appearance facing reporters since receiving a subpoena from a grand jury related to a Department of Justice investigation. The DOJ is investigating the Fed's ongoing office renovation project and Powell's testimony last year to Congress about the project. This move has angered several Republican lawmakers and frustrated Powell, who has criticized the subpoena as a direct threat to the Fed's ability to independently set rates free from "political pressure or intimidation." His strong response has sparked speculation: Powell may choose to remain a member of the Fed Board after his term as Chair ends in May. This would deny Trump another chance to influence the Board and potentially weaken the ability of the next Chair to impact interest rates. One thing certain is that Powell will face questions about his intentions after May, the DOJ investigation, and his attendance at a Supreme Court confirmation hearing last week regarding the government's attempt to dismiss Board member Lisa Cook. Economist Derrick Hamilton of New College believes the political storm surrounding the Fed is a sign of "extraordinary times" that could make the outcome of rate decisions more difficult to predict. "I don't think this will cause current members to change their original decision directions," he said. Nevertheless, "the pressure exists, and I suspect it will have an impact."