- US: Latest threat by the US Justice Department to indict Powell underscores renewed fears about Fed independence; better-than-expected unemployment rate and sanguine CPI should reinforce the Fed’s case to maintain its rate unchanged at the January meeting
- Japan: Prime Minister Takaichi is considering calling a snap election as early as February, which is expected to increase fiscal spending discussions; this is likely to reinforce the BOJ’s case to keep policy rate unchanged at 0.75% in the January and March meetings
- Indonesia: Markets eye fiscal developments with trepidation after 2025 deficit neared the statutory cap of -3% of GDP; we trim our forecast to keep the neutral rate at 4.25% and defer to the second half of the year
Related Insights
US: Threat to Fed’s independence; FOMC to pause rate cut in January. The latest threat by the US Justice Department to indict Fed Chair Jerome Powell over the Fed’s headquarters renovation project underscored the Trump administration’s challenge to the Fed’s independence. Even without an indictment, the move signalled that legal and political pressures could be brought to bear on policymakers after Powell’s term ends in May, blurring the institutional firewall between the White House and the Fed. Major central banks have publicly rallied behind Powell, issuing an unusually coordinated statement defending central bank independence as the cornerstone of price, financial, and economic stability in the interest of citizens they serve.
New York Fed President John Williams indicated on 13 Jan that the Fed will likely keep rates unchanged at the 28 Jan FOMC meeting. He said that the latest rate cuts have brought risks back into better balance, with monetary policy now closer to neutral. He expected no rapid deterioration in the labour market, which he reckoned would stabilise and strengthen. While he estimated that tariffs added about 0.5% to inflation, he saw inflation peaking in the first half of this year before returning to the 2% target. Finally, Williams expected 2026 GDP growth to be above trend at 2.5-2.75%.
Meanwhile, US December headline CPI came in line with consensus at 0.3% m/m sa, while core CPI was a touch below expectations (actual: 0.2% m/m sa, consensus: 0.3%). The 1.1% m/m decline in used car prices was the biggest drag on CPI. On the upside, the 0.7% m/m increase in food prices was notable. We also note a moderate 0.4% m/m bump in shelter prices after several months of muted gains. Taken together, this set of inflation data will not be a game changer for market participants, reinforcing the case for the Fed to maintain its rate unchanged at the January meeting.
Regarding the US Supreme Court’s ruling on the legality of President Donald Trump’s IEEPA tariffs, while the Court has signalled upcoming opinion dates, it has not confirmed that the tariff cases are on the agenda. The court’s deferral into later January or even mid-year remains plausible, prolonging policy uncertainty. Markets currently believe that the Court will rule against the tariffs.
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