Synopsis:

Goldman Sachs anticipates tomorrow's January FOMC meeting to offer little new information. The Fed is likely to highlight labor market stabilization but avoid detailed guidance on future rate moves, particularly March.

Key Points:

1. Labor Market Stabilization Noted:

   • The FOMC may acknowledge signs of labor market stabilization in its statement but is unlikely to provide forward guidance for March policy actions.

2. Tariff Impacts on Inflation:

   • Tariffs are expected to provide a modest, one-time inflation boost, which the Fed could overlook.
   • Historically, Fed officials have downplayed the inflationary effects of tariffs, focusing more on potential GDP impacts.

3. Baseline Forecast:

   • Goldman expects two 25bp rate cuts in 2025—one in June and another in December—with an additional cut in 2026.
   • Timing of cuts remains uncertain, particularly given the challenge of navigating tariff-related risks.

4. Market Mispricing of Fed Policy:

   • Goldman maintains that market expectations are too hawkish, with an overestimation of the likelihood of rate hikes.

Conclusion:

The January FOMC meeting is likely to serve as a placeholder, with limited changes to policy guidance. The Fed's response to tariffs and its data dependence will shape the timing of future rate cuts. Markets may need to reassess overly hawkish expectation