Today’s Federal Reserve meeting marks the first major event on this week's calendar, with markets focused on Chair Powell’s commentary regarding potential future rate cuts and any adjustments based on fiscal policy measures from the new administration.

According to the CME’s Fed Watch tool, the market expects the Federal Reserve to maintain interest rates at their current range of 4.25%–4.50%, with a 99.5% probability that no action will be taken during this meeting. The next anticipated rate cut is currently projected for June, with an estimated 75.7% probability. While expectations for rate cuts can shift rapidly, the market is pricing in at least two maintenance cuts for the year.

Powell’s assessment of the economic landscape will be critical for equity and Treasury markets. An often-overlooked aspect of these meetings is the Fed’s Personal Consumption Expenditures (PCE) projections, which Powell frequently references. The December PCE data, set for release on Friday, will serve as a key economic indicator to close out the week.

The Q&A session today may be the main volatility driver. Powell is almost certain to face questions about the new administration’s fiscal policy approach. If he provides insight into how the Fed is factoring in fiscal policy, it could trigger a notable shift in the yield curve.

Another key issue to monitor is whether Powell addresses the recent pause in Federal grant spending, which could impact social safety net programs and overall economic activity. While reduced spending may have a disinflationary effect on prices, it could also weaken consumer demand and the labor market. Currently, the court system has temporarily halted the pause, citing uncertainty regarding which programs would be affected and concerns over the constitutionality of the order.

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