When the Federal Open Market Committee (FOMC) reconvenes Tuesday for its first monetary policy sit-down of 2026, it will be largely free of the usual rate-cut uncertainty.
As of Monday afternoon, just 4% of interest-rate traders were predicting a Fed rate cut, according to the CME FedWatch tool. The other 96% think the central bank will hold rates steady following three consecutive quarter-point cuts to close out 2025.
But the two-day summit and the post-meeting press conference on Wednesday featuring Federal Reserve Chairman Jerome Powell will carry an unusual degree of drama nonetheless.
Besides being asked to explain the interest rate decision, reporters will inevitably pepper Powell with questions about his recent revelation that he was served with a subpoena by the Department of Justice, raising the possibility of a criminal indictment related to Senate Banking Committee testimony he gave last June.
Powell, in an extraordinary video statement released Jan. 11, tied the DOJ probe to President Donald Trump’s displeasure that rates have been kept higher than his liking, saying the threat of criminal charges “is a consequence of the Federal Reserve setting interest rates based on our best assessment of what will serve the public, rather than following the preferences of the president.”
The Fed chair will also likely be asked about last week’s emergency Supreme Court hearing, in which justices heard oral arguments about whether Powell’s colleague, Fed Governor Lisa Cook, should be allowed to remain in office while a case involving unproven allegations of mortgage fraud proceeds.
Powell attended the Supreme Court hearing, a move Treasury Secretary Scott Bessent blasted as “a real mistake,” claiming the Fed chair’s mere presence in the courtroom carried political weight and effectively “put his thumb on the scale.”
Another converging subplot is the impending announcement of a nominee to succeed Powell as Fed chair, whose term expires in May. Bessent told reporters last week that Trump’s decision could be made public this week — though he didn’t specify if he thinks it will be before or after the interest rate announcement.
Both the Powell probe and the Cook case have been widely perceived as posing potential threats to Federal Reserve independence, leading to speculation that Powell might choose to remain on the Fed’s board and the FOMC after his chairmanship term ends — a move that has few historical precedents and would be perceived as an escalation of his feud with Trump.
‘A higher bar for additional easing’
Sam Williamson, a senior economist with First American Financial Corp., notes that even though the Fed cut rates in December, the vote was “relatively close,” with six Fed officials among the voting and non-voting committee members signaling a preference to hold rates steady.
Williamson thinks this suggests a “higher bar for additional easing,” as the Fed remains divided over inflation that remains above its 2% target and a labor market that is only “modestly cooler than conditions typically associated with full employment.” But, “even with a pause,” he adds, the central bank is “unlikely to frame the January decision as the end of the easing cycle.”
“Post‑meeting communications will likely emphasize that last year’s cumulative cuts give officials room to move more deliberately, while monitoring incoming data and broader financing conditions,” Williamson says. “If inflation continues to ease in a sustained way or if economic growth weakens more than expected, additional reductions later this year remain possible.”
Melissa Cohn, regional vice president of William Raveis Mortgage, is certain the Fed will hit the pause button on rate cuts this week.
“There’s no way they can possibly cut rates in this political and potentially inflationary environment,” Cohn observes in commentary provided to Scotsman Guide.
She points to the geopolitical chaos surrounding Trump’s proposed annexation of Greenland and his subsequent threats of increased tariffs against European trading partners as potential inflationary triggers that would work against the rate-cut narrative.
Consequently, she warns that while a de-escalation of geopolitical tensions could lead to mortgage rates easing, borrowers should be prepared for rates remaining higher for longer.
“Rates go up way faster than they come down,” Cohn says.
