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New York Fed President John Williams signalled that the Fed will likely keep rates unchanged at the January 28 FOMC meeting. He argued that the latest rate cuts have brought risks back into better balance with monetary policy closer to neutral. He did not expect a rapid deterioration in the labour market, which he saw stabilizing and strengthening, as 2026 growth runs above trend at 2.5-2.75%. Williams also estimated that tariffs would add about 0.5% to inflation, peaking in the first half of this year before easing back toward the 2% target.
Attention also shifted to Fed leadership succession. US President Donald Trump said he was done with interviews and has someone in mind to replace Fed Chair Jerome Powell when his term ends in May. Former Fed Governor Kevin Warsh has emerged as the clear frontrunner after Trump expressed a preference to keep Kevin Hassett in his current role as National Economic Council Director. Warsh is considered easier to confirm by the Senate because he is not viewed as part of Trump’s inner circle and seen as institutionally orthodox. The January 2026 subpoenas of Powell sparked a backlash, with some Republican senators, including Thom Tillis and Lisa Murkowski, threatening to block any nominee until the situation was resolved. Warsh is viewed as the candidate best suited to "de-escalate" these tensions because of his reputation for protecting the Fed's traditional autonomy. The Supreme Court’s hearing on Fed Governor Lisa Cook underscored the importance of the Fed’s independence by expressing deep concerns over granting the President unchecked powers to remove Fed officials.
USD/CNY rose for a second day by 0.1% to 6.9708 on Thursday, hinting that the CNY’s appreciation over the past 1-2 months may lose momentum. According to a Xinhua news interview, People’s Bank of China Governor Pan Gongsheng reiterated that monetary policy will remain accommodative in 2026, downplaying the recent inflation uptick as temporary. Policy will remain focused on supporting growth and ensuring ample liquidity through further interest rate cuts and reductions in the reserve requirement ratio, while maintaining the exchange rate at a “basically stable” level and guarding against overshooting risks.
AUD/USD surged by 0.8% to 0.6814 on Wednesday, its highest closing level since early October 2025. Markets see a divergence in the dual mandates, with the Reserve Bank of Australia more focused on inflation, and the Fed alert to labour market risks. The futures market is pricing a 58.9% probability of a 25-bps RBA hike to 3.85% at the February 3 meeting. Australia’s unemployment rate fell to 4.1% in December, defying expectations for it to hold at November’s 4.3% level. On January 28, CPI and trimmed mean inflation are expected to remain elevated at 3.3% YoY in December, above the medium-term inflation target band of 2-3%. Real GDP growth expanded above 2% for the first time in two years, with domestic demand contributing 1.1% out of the 2.1% growth in 3Q25.
Yesterday’s 0.4% decline in the DXY Index reflected an unwinding of the geopolitical risk premium about escalation risks around Greenland. Attention will likely shift back to the Fed, where guidance points to a January hold with policy closer to neutral. Greater clarity on Fed leadership succession has reduced near-term risk about its independence. Against this backdrop, we are cautious about the market’s bet that the appreciation momentum of the AUD and CNY will continue unbated.
Quote of the Day
“The saddest aspect of life right now is that science gathers knowledge faster than society gathers wisdom.”
Isaac Asimov
January 23 in history
The first successful treatment with insulin was given to a diabetic in 1922.
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