- The United States Federal Reserve is set to raise rates by 25 bps despite some signs of economic weakness.
- A relatively robust jobs market will likely cause Fed Chair Jerome Powell to be relatively hawkish.
- Officials are set to wait for new data and new forecasts in March to signal potential softer policy.
The cracks are beginning to show – but the world's most powerful central bank will likely shrug it off. Seeing the glass half full will likely hit stocks and boost the US Dollar in the upcoming Federal Reserve (Fed) decision, set to be announced on Wednesday, February 1 at 19 GMT.
The Good – Inflation is coming down while unemployment remains low
The Federal Reserve has two mandates, full employment and price stability. Headline inflation has come down from a peak of 9.1% to 6.5%, and also the Core Consumer Price Index (Core CPI) is down from its peak, at 5.7%.
It is not only the price at the pump, nor the prices of food, but also less-volatile items:
US CPI ex Food & Energy (YoY)
On the other mandate, employment, the picture is rosier – thus pushing inflation higher. According to the most recent JOLTs job openings reports, there are roughly two vacancies for every unemployed person in the United States.
US JOLTS Job Openings
That drives employers to raise wages, adding to price pressures. The broader measure of the labor market, the unemployment rate, is at 3.5%. That matches the pre-pandemic trough – also the lowest since 1969.
US Unemployment Rate
In such an environment, there is more room to raise interest rates to ensure that inflation continues falling. Fed Chair Jerome Powell stressed that the bank wants to refrain from moving prematurely. History shows that declaring victory early leads to renewed price pressures down the road.
The Bad – Cracks are showing in the US economy
Is the labor market so resilient? Layoffs in tech companies have been intensifying and accelerating in recent weeks, affecting not only top earners hired in the talent wars of 2021, but also reaching other workers. That is some hard data to digest.
Fears of a recession are also showing in soft data. The ISM Purchasing Managers' Index (PMI) for the Services sector paints a worried picture, falling into contraction in America's largest sector.
ISM Services PMI
Layoffs at Silicon Valley and a drop in business sentiment may push inflation lower, and they join signs of cooling from the housing sector – directly impacted by rising interest rates. Supply chain issues have mostly been resolved, also cutting costs.
The Ugly – Uncertainty is high
The Fed's interest rate rose from 0% to a range of 4.25-4.50%, and there may be more room to raise rates, but how long does it take these moves to crush inflation? In the past, it took policy some 12-18 months to fully reach the economy. However, the times are changing and everything is moving faster. But exactly how fast? That remains a topic of heated debate.
Moreover, Fed "insider" Nick Timiraos of the Wall Street Journal (WSJ) reported that some at the Federal Reserve are worried about a renewed wave of inflation. Some disagree.
The final arbiter is the data. Between the upcoming Fed decision on February 1 and the following one in March 22, the United States releases two more Nonfarm Payrolls (NFP) reports, and a pair of CPI publications.
In addition, the Fed will present new forecasts for inflation, employment, growth and interest rates in its March decision. All in all, there is no reason for the central bank to stray from its message – to hike borrowing costs to above 5% and leave them there for the remainder of the year.
Fed Interest Rate expectations
Expected market reaction – Stocks down, US Dollar up
The Federal Reserve is set to raise interest rates by 25 bps – that is fully priced in, and the bank does not surprise investors. The question is: will officials signal an upcoming pause? My answer is a clear “No.”
While worrying signs are beginning to show, Fed Chair Jerome Powell and his colleagues will find evidence of softness too weak at this point. The bank will likely continue focusing on robust job data and the fact that non-shelter core services inflation – which is price rises driven by wages – is still too high.
Moreover, the uncertainty mentioned above is a reason to wait with any signal of a pause – and that is not what investors want to see. Bond markets are pricing a peak interest rate of just below 5% and cuts later this year. A denial from Powell would send it down.
If Jerome Powell conveys a hawkish message as I expect, the US Dollar will rise, benefiting from prospects of higher rates – and from safe-haven flows. If the United States continues to cool down its economy, it will affect the entire world, causing a downturn. In times of worry, the Greenback is the currency of choice.
Will the downbeat mood persist? Not necessarily. Another message that Powell is set to reiterate is that the bank is data-dependent. Additional cracks in the US economy would cause a rethink by officials. The focus will soon shift from fighting inflation to fighting a recession – but not in the February 1 Fed decision.
Final thoughts
Markets react several times to the Federal Reserve decision, making trading the event difficult compared to other ones. Investors respond to the publication, then to Jerome Powell's press conference, and the narrative takes more time to settle in. I recommend new traders to trade with lower leverage or stay on the sidelines.
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers. The author will not be held responsible for information that is found at the end of links posted on this page.
If not otherwise explicitly mentioned in the body of the article, at the time of writing, the author has no position in any stock mentioned in this article and no business relationship with any company mentioned. The author has not received compensation for writing this article, other than from FXStreet.
FXStreet and the author do not provide personalized recommendations. The author makes no representations as to the accuracy, completeness, or suitability of this information. FXStreet and the author will not be liable for any errors, omissions or any losses, injuries or damages arising from this information and its display or use. Errors and omissions excepted.
The author and FXStreet are not registered investment advisors and nothing in this article is intended to be investment advice.
Recommended Content
Editors’ Picks

AUD/USD holds steady as tariff jitters offset hawkish RBA and a softer USD
AUD/USD extends its sideways consolidative price move for the second consecutive day on Thursday amid mixed cues. The RBA's hawkish on-hold rate decision earlier this week acts as a tailwind for the pair, while prospects for more interest rate cuts by the Fed this year undermine the USD.

USD/JPY retreats further from over two-week high; downside seems limited
USD/JPY extends its retracement slide from over a two-week high for the second straight day as reviving safe-haven demand benefits the JPY. The USD, on the other hand, is pressured by relatively dovish FOMC minutes, showing that officials expect lower interest rates at some point this year.

Gold price builds on overnight bounce from over one-week low
Gold price attracts buyers for the second consecutive day amid renewed safe-haven buying, bolstered by trade jitters and US fiscal concerns. Moreover, prospects for further interest rate cuts by the Fed this year undermine the USD and assist the non-yielding yellow metal to move away from a 1-1/2-week low touched on Wednesday.

Tokenization could pull in 5% of $257 trillion global stock, bond markets: Bitwise
Tokenization of stocks and bonds is expected to capture 1-5% of the combined value of the bond and stock markets, currently at $257 trillion, according to Bitwise executives Matt Hougan and Ryan Rasmussen in a note to investors on Wednesday.

New US tariffs target Asia, but some countries stand to gain
President Trump’s new tariffs are higher than expected for most Asian economies. Moreover, most countries will face additional tariff rates on transshipments. The new announcements are silent on Singapore, India and the Philippines, which might stand to benefit from tariff concessions if negotiations progress favourably.

Best Brokers for EUR/USD Trading
SPONSORED Discover the top brokers for trading EUR/USD in 2025. Our list features brokers with competitive spreads, fast execution, and powerful platforms. Whether you're a beginner or an expert, find the right partner to navigate the dynamic Forex market.