Markets have fully priced in the Federal Reserve leaving its benchmark rate unchanged at 3.50-3.75% at this week's meeting. The real battleground now is whether this pause will be “dovish” or “hawkish”. Morgan Stanley and Bank of America both expect Chair Jerome Powell to lean dovish, especially if he retains forward guidance language that keeps the door open for future cuts.
Pause Is a Done Deal; 58% of Economists See No Move All Quarter
According to Bloomberg and Reuters surveys, all economists polled expect the Fed to hold rates steady, with 58% projecting no change through the entire first quarter. Money markets price in about 45 basis points of total cuts by year-end, with the first 25bp reduction likely in July. Goldman Sachs called this meeting “uneventful”, anticipating only minor statement tweaks. Morgan Stanley explicitly forecasts a “dovish pause” — stable labor markets and solid economic activity justify stopping, but confidence in disinflation later this year will keep the Fed tilted toward easing.
Statement Tweaks: Dropping “Downside Risks to Employment” Could Be Key
Institutions expect several adjustments. Morgan Stanley sees the committee upgrading its assessment of economic growth from “moderate” to “solid”, and more importantly, removing the phrase “downside risks to employment have increased” — logically, a pause implies reduced concern about the labor market. Barclays agrees, saying the statement will note “employment growth slowed over the past year and the unemployment rate moved up modestly” but drop the line “recent indicators are consistent with these developments.” On inflation, though recent core PCE readings have been relatively mild (distorted by the government shutdown), the statement is expected to keep the description “inflation has moved up in recent months and remains elevated.”
The most sensitive part: forward guidance. Markets expect the Fed to retain the phrase “in considering the extent and timing of further adjustments to the target range,” implying a continued easing bias (dovish pause). Changing it to “in considering any adjustments to the target range” would signal a longer pause (hawkish pause).
Powell’s Presser: Three Key Focal Points
Bank of America Securities argues Powell’s press conference may lean dovish relative to the recent rate repricing. Analysts will watch three areas: Labor market assessment — does Powell highlight the December drop in unemployment to 4.4% or dismiss it as one month? Does he reiterate tolerance for a small further rise? In December, he said that after 75bp of cuts, policy should “be able to keep the labor market stable or allow only one or two more tenths of a percent increase in unemployment.” Inflation outlook — will he focus on the trailing core PCE of about 3%, or on persistent housing disinflation and tariff-driven inflation coming in below expectations? Citi expects core PCE at 2.8% in Q4 2025, below the December SEP median of 3.0%. Neutral rate commentary — in December, Powell said policy is “within the range of reasonable estimates of the neutral rate.” Any shift in language, or greater emphasis on productivity improvement, would be notable.
Political Pressure Mounting; Powell May Plead the Fifth
Nick Timiraos, the “new Fed whisperer,” notes that the White House is applying unprecedented political heat. This month, the Justice Department opened a criminal investigation into Powell. Last week, the Supreme Court heard oral arguments on whether President Trump can fire Fed Governor Cook. Analysts expect Powell will face many political questions but likely respond with “no comment” and reiterate the Fed’s independence.
Rate Path Divergence; At Least One More Cut This Year
Institutions disagree on the timing of future cuts. Goldman sees 25bp cuts in June and September, bringing rates to 3.00-3.25%. Barclays expects cuts in June and December. Citi forecasts 75bp total in March, July, and September. At the December meeting, 12 of 19 officials projected at least one more cut this year, but that cut drew two dissents and some wavering support. Timiraos argues that to cut before mid-year, labor market deterioration would almost certainly be required, as inflation has made virtually no progress in 18 months.
This meeting is likely to see at least one dissenting vote from Governor Stephen Miran, who has voted for more aggressive easing at every meeting since joining last September. He may favor a 25bp or even 50bp cut. That would be the fifth consecutive dissenting vote, highlighting deep committee divisions. Governors Bowman and Waller could also vote for a cut. Waller’s vote is particularly closely watched — he is one of Trump’s potential picks to replace Powell. Voting for a cut could improve his chances, while voting to hold may burnish his independent credentials but possibly cost him the chairmanship.
Market impact: Bank of America sees limited price action as the base case. EUR/USD has typically moved within about ±0.2% around hold meetings, averaging near zero. Unless a major surprise emerges, net price action should be muted.