At the last FOMC meeting of the year, most members voted to cut rates by 25 bp, citing rising downside risks to employment and upside risks to inflation. That partly fueled gains in gold and silver while the dollar weakened.
Two months later, what has changed?
At first glance, the labor market appears to be improving: U.S. nonfarm payrolls rose by 130,000 in January, while economists had expected an average increase of around 70,000. The employment report was one of the most anticipated releases on this month's economic calendar, given its potential impact on Federal Reserve policy. The private sector alone added 172,000 jobs, suggesting a solid start to the year.
But on closer look, the picture is far less rosy.
Over the past full year, the U.S. created only 181,000 jobs, according to the latest data — a very modest figure that points more to stagnation than to expansion. Even more worrying is that employment gains for 2025 were revised downward by 1,029,000, the largest annual downward revision in at least two decades.
Who can guarantee that what currently appears as growth won’t later turn into a decline?
As for inflation, it appears to remain stubbornly closer to 3% than the Fed’s 2% target.
In particular, average hourly earnings for private-sector workers rose 0.4% in January, reaching $37.17, 3.7% higher than a year ago, right in line with forecasts. Headline inflation came in slightly better than expected at 0.2% monthly and 2.4% annually, while core inflation, which excludes food and energy, rose 0.3% monthly and 2.5% yearly.
And yet, markets are pricing in at least two Fed rate cuts this year, providing some support for the S&P 500. S&P 500 futures have been trading with cautious optimism, reflecting investor expectations that monetary policy will remain accommodative despite mixed economic signals. Many expect that, following Jerome Powell's resignation, the Fed may shift toward a more accommodative monetary policy, pointing to potential Fed chair candidate Kevin Warsh, who has suggested that the Fed has been too slow to cut rates and too “backward-looking.”
It is also true, however, that Warsh could quickly revert to a hawkish stance if inflation starts accelerating again.
What could drive inflation higher?
A recent study from the Federal Reserve Bank of New York found that in 2025, U.S. companies and consumers absorbed 90% of tariff costs. Thus, businesses may eventually raise prices to offset those losses. Another risk comes from surging memory chip prices fueled by the AI boom, which could push up costs for technology, automotive, and consumer electronics, feeding inflation across the economy.