After CPI Release, Fed's April Rate Cut Probability Rises to 42%

The U.S. Federal Reserve's January rate decision remains in focus as traders reassess the likelihood of a policy shift in early 2026. Fed officials have largely signaled patience, with New York Fed President John Williams recently stating there is no rush for additional rate cuts. Market pricing of rate cuts has not yet aligned with these comments, with futures markets showing a 42% probability of a 25-basis point rate cut at the April FOMC meeting according to pricing data.

Williams emphasized that monetary policy is now well positioned to support labor market stability and inflation returning to the Fed's 2% target. He projected the unemployment rate to stabilize in 2026 and then gradually decline over the next several years. The recent U.S. CPI data also contributed to a more cautious outlook on near-term rate cuts as data suggests.

The U.S. dollar has weakened against several major currencies as concerns grow about the Fed's independence. A DOJ investigation into Fed Chair Jerome Powell has raised questions about the central bank's ability to act without political pressure. This has contributed to a shift in market expectations for the Fed's policy path.

Why Did This Happen?

The latest CPI data showed signs of easing inflationary pressures, particularly in shelter costs. This has tempered some of the immediate urgency for rate cuts, with traders now pricing in around two cuts in 2026, rather than more aggressive easing according to market analysis.

New York Fed President Williams' comments reinforce a cautious approach, with financial conditions already considered loose enough to support economic growth. He noted that inflation is expected to peak at 2.75%-3.0% in early 2026 before declining further.

How Did Markets React?

Currency markets have responded to the evolving policy outlook by pushing the U.S. dollar lower against several major currencies. The NZD/USD pair traded above 0.5770 as concerns about the Fed's independence grew according to trading data. Similarly, the GBP/USD pair edged higher as the greenback weakened following the DOJ's investigation into Powell according to market reports.

In commodities, gold prices rose to a record high of $4,600 as investors sought safe-haven assets amid heightened uncertainty about central bank independence. This has created new opportunities in the gold market, with analysts noting potential for further gains if political pressures on the Fed persist as market analysis indicates.

What Are Analysts Watching Next?

The December U.S. CPI report, due for release later in the week, will be a critical data point for investors. Commerzbank Research's Christoph Rieger noted that the report could reduce immediate fears of politically driven rate cuts. The report may confirm a slowdown in inflationary pressures, particularly from rents, which have been a key factor in core inflation.

Analysts are also closely monitoring the Fed's policy normalization path. Some believe the central bank is nearing the neutral rate level, with only two more 25-basis point cuts needed to reach that threshold. However, if the current administration's influence on monetary policy continues to grow, the Fed could face pressure to extend easing beyond what is considered appropriate according to market analysis.

Investors remain divided on the timing of the next rate cut. While some believe the March meeting could see a 25-basis point cut, others think the Fed will hold until April or later as market reports indicate. The key factor will be whether inflation continues to ease naturally or if new fiscal policies create new pressures on the central bank to act.

Bitcoin and Ethereum ETFs have also been impacted by the evolving rate cut expectations. After initially benefiting from early-year rate cut hopes, both assets have seen nearly all their 2026 gains erased as traders scale back on the likelihood of aggressive easing according to trading data. This shift reflects the broader market's recalibration to a more cautious Fed stance.

The coming weeks will be crucial for shaping the Fed's 2026 policy path. With the central bank's independence under scrutiny and market expectations shifting, investors will need to closely track both economic data and political developments to navigate the evolving environment.