The Federal Reserve's January FOMC meeting is approaching, and market expectations for its decision are becoming increasingly clear. According to CME's FedWatch Tool data, the probability of the Fed maintaining the current interest rate of 3.5%-3.75% remains around 80%. Although this figure has decreased from the previous 86%, "pausing rate cuts" still remains the consensus for most. In other words, the pace of consecutive rate cuts is likely to be interrupted.

Why is this happening? The Fed faces a dilemma between inflation and employment. The previous three rate cuts totaling 75 basis points were intended to alleviate worsening employment conditions, but inflation has not yet fallen to the 2% target. In November, US CPI increased by 2.7% year-over-year. Although government shutdowns may have caused data distortions, this figure is enough to alert hawks. Cleveland Fed President and other hawkish officials advocate stabilizing rates before spring and maintaining a high level of vigilance against inflation.

The issue is, internal opinions are not uniform. Fed Governor Mester and other doves warn that if rate cuts do not continue, the risk of a recession will increase. They have not ruled out the possibility of supporting rate cuts in January. Even regarding expectations after March, the market holds two views: some believe there will be another 25 basis point cut in March, while others think rates should remain unchanged, with the probabilities of both scenarios roughly evenly split.

Powell's recent statements reveal how cautious the decision-making body is. He emphasized that risks come from two directions and that decisions should be data-driven. This year, FOMC voting members will rotate, increasing the influence of hawkish members, further reinforcing expectations of a pause. Major institutions like Goldman Sachs and Morgan Stanley have pushed back their timing for rate cuts throughout the year, now generally expecting them in March or later.

But it’s important to understand that this pause is not the end of the rate-cut cycle; it is merely a reassessment of the fundamentals. The ultimate direction will still depend on non-farm payroll data and inflation figures before the meeting. The January meeting statement and Powell’s remarks will serve as market signals, and global asset prices will fluctuate accordingly. The final resolution of the divergence depends on further data.