During the January FOMC meeting, Powell made a concerted effort to maintain a stance of providing "no new guidance," attempting to convince markets that the Fed is currently in a wait-and-see mode, holding policy steady. However, for astute investors, the signals from this meeting were far more dovish than they appeared on the surface. While the Fed held rates steady, Powell acknowledged that the current policy rate is in a "slightly restrictive" range and expressed caution regarding purported signs of "stabilization" in the labor market. This effectively revealed underlying concerns within the Fed about an economic slowdown. According to market analysis, on January 28th, Citigroup pinpointed the core message in its latest research report: despite the Fed's current pause, the threshold for initiating rate cuts is actually quite low. Whether it's a rise in the unemployment rate or signs of persistently slowing inflation, either could quickly trigger a rate cut. Based on this, Citigroup maintains its aggressive forecast, predicting the Fed will cut rates by a cumulative 75 basis points in 2026. For investors, this implies that the liquidity inflection point is not far off, and the current "pause" is merely a prelude to the next round of easing. Key trading windows are likely in March, July, and September—the periods Citigroup anticipates for potential rate cuts. Don't be misled by Powell's surface-level calm; the real game lies in his characterization of "restrictive" rates, which leaves ample runway for a subsequent policy pivot.

The Vague "Neutral" and the Explicit "Restrictive"

The most intriguing detail of this meeting was Powell's description of the current interest rate level. He continued to describe the policy rate as being at the top of the neutral range, stating it "may be roughly neutral, or slightly on the tight side." This semantic nuance is critical. A "loose neutral" would suggest the Fed could maintain the status quo for an extended period; but a "slightly restrictive" characterization implies that if inflation continues to fall, real interest rates would effectively rise, potentially overly suppressing the economy. Powell reiterated that most officials expect further rate cuts this year, and currently, no official has included a rate hike in their baseline forecast. This statement effectively closes the door on hike risks, establishing a one-way downward trend for rates, with the only remaining suspense being the timing.

Labor Market: Superficial Stability and Underlying Weakness

The Fed made a subtle adjustment in its policy statement's description of the labor market, changing the previous characterization of the unemployment rate "gradually increasing" to "showing some signs of stabilization," and removing the phrase that "the risks to employment have increased in recent months." Superficially, this seemed to bolster a hawkish stance. However, Citigroup notes that investors must not overinterpret this change. Powell explicitly downplayed this revision during the press conference, cautioning that he "wouldn't want to make too much of it." While he acknowledged it might be an early sign of stabilization, he simultaneously listed evidence that the labor market is still softening. He specifically cited data from The Conference Board's consumer survey, pointing out that the number of people viewing jobs as "plentiful" is declining, while those finding jobs "hard to get" is rising. This indicates the Fed Chair himself does not believe the labor market is out of the woods; this "picky" attitude towards data hints at his inclination to find reasons to cut rates.

Inflation Path: Tariff Disruptions Don't Alter the Downward Trend

On inflation, Powell maintained a constructive attitude, believing inflation will continue to return to the 2% target. The reason core inflation is currently slightly above target is primarily due to tariff-related increases in goods prices. Powell explicitly stated that this tariff-driven strength in goods prices is expected to fade around the middle of this year. Meanwhile, services prices are moderating. This suggests the Fed views the current inflation rebound as a temporary supply-side shock, not overheating demand. As long as services inflation continues to decelerate, the Fed is confident it can achieve its inflation target later this year. This characterization of the causes of inflation further clears the path for rate cuts.

Internal Divisions Emerge: Waller Casts a Dissenting Vote

This meeting was not entirely unified, as the voting results revealed internal divisions at the Fed. While the majority supported holding rates steady, Miran and Waller dissented, favoring an immediate 25 basis point cut at this meeting. Waller's dissent, in particular, while anticipated by markets, merely confirms his known dovish stance. In contrast, Goolsbee and Schmid leaned towards maintaining the status quo. This internal division indicates that, even during a pause, the forces supporting easing remain strong and are not entirely convinced by the so-called "robust" economic data.