A week for the central banks

After lowering the key policy rate by 25bp at each of their three previous meetings, policymakers at the US Federal Reserve began 2026 by leaving the federal funds rate unchanged in the range between 3.50%-3.75% at their meeting on 22 January.

The Fed’s decision reflects the current strength in the US economy. Official statistics showed annualised GDP growth of 4.4% in the third quarter of 2025. The Atlanta Fed forecasts it could have jumped as high as 5.2% in the fourth quarter.

In his comments after the meeting, Fed Chair Jay Powell underlined the resilience of the economy, noting it has once again surprised with its strength. Fed policymakers now appear more comfortable with the current economic situation.

Whereas in December, their post-meeting statement referred to economic activity expanding at a moderate pace, it is now seen to be at a solid pace. Similarly, the Fed now says the unemployment rate has shown signs of stabilisation. It dropped a previous reference to a shift in the balance of risks towards unemployment and away from inflation altogether.

The change to the Federal Open Market Committee’s policy statement suggests that the Fed may not cut policy rates again for at least a couple more meetings.

Nonetheless, the two dissenting votes in favour of a 25bp cut from governors Stephen Miran and Christopher Waller at the latest meeting suggest that the bias is still towards further loosening. 

A delay for US employment data  

After a bipartisan deal on US government spending failed to clear Congress on 1 February, there will be a lapse in federal funding for some departments. The resulting partial government shutdown means the Bureau of Labor Statistics will not be releasing the January jobs report on Friday 6 February as was scheduled.

Assuming a short shutdown (i.e., workers returning on Wednesday or at the latest Thursday), the earliest publication of the employment data would be next Tuesday, 10 February.

A new Fed Chair

On 30 January, after months of discussions and speculation, President Donald Trump nominated Kevin Warsh as the next Federal Reserve Chair.

As a Fed governor between 2006-2011, academic and banker,  Warsh is well qualified to lead the Fed. He will succeed Jay Powell when his term ends in May, subject to approval by the Senate.

Fed independence

Kevin Warsh’s appointment comes at a time when the US central bank is facing a test of its independence. Developments so far suggest that the Fed’s independence has not been seriously undermined.

Firstly, in December, the Fed’s board advanced the reappointment, for five years, of 11 of the regional presidents. Of these, one (the head of the New York Fed) has a permanent vote on the rate-setting FOMC. Four voting seats alternate each year between the 10 others.

These heads of quasi-private regional reserve banks are hired by their own local boards of directors, although the Fed in Washington can weigh in on the process. The system, set out in the Federal Reserve Act, was designed to ensure that US central bank policy reflected input from officials around the country, not just political appointees based in Washington.

These regional Fed heads have represented a particular challenge to the Trump administration's desire for the Fed to slash interest rates. Many of these officials have hesitated over the last year or opposed rate cuts due to their concerns over still-high inflation.

Of the seven other governors on the FOMC, Stephen Miram’s seat technically expires this month. His place may be taken by Warsh. Jay Powell’s term expires in May. He may leave the Federal Reserve, but he could opt to stay on for another two years.

The legal case being pursued by the Trump administration against Governor Lisa Cook appears unlikely to be resolved in the short term.

To summarise, it is difficult to envisage a radical change in the composition of the FOMC that would render it vulnerable to political influence. It will likely take time for the new chair to win the support of all FOMC members and establish a consensus at the committee. Clearly, there is a body of members who will not be replaced soon and who will be sensitive to any suggestion of succumbing to political pressure. 

Market reaction to Kevin Warsh

Market reaction to the nomination of Warsh suggests investors see him as a more orthodox choice than other potential candidates. His nomination appears to have eased market concerns over Fed independence after President Trump’s efforts to force it to lower borrowing costs.

Prices of gold and silver fell in a sharp reversal of their powerful rally in recent months. Valuations of both precious metals have risen fast as geopolitical tensions and market concerns over the independence of the Fed led investors to haven assets.

Warsh’s nomination appears to have allayed concern that a new Fed chair could go easier on inflation, a worry that had fuelled gains in precious metals.

Similarly, in foreign exchange markets, the US dollar has rallied in reaction to Warsh being tapped. The dollar has fallen significantly over the last 18 months as investors have reacted to the perception that the Trump administration, despite some assertions to the contrary, seeks a weaker dollar.

In our view, talk of an end to the dollar’s dominance in the global financial system is overdone. It is too deeply entrenched in global finance and lacks credible rivals for this role. When viewed on a long-term basis (see Exhibit 1), the dollar’s weakening relative to the value of the currencies of major US trading partners does not seem excessive. 

ECB and BoE on hold, but RBA hikes rates

The governing council of the European Central Bank meets this week, but it is expected not to change monetary policy with the deposit rate to remain at 2.0%. With recent data having indicated no major changes in the Eurozone economy, the ECB is likely to reaffirm its commitment to a data-dependent and meeting-by-meeting approach.

Given its recent communications, the Bank of England is also expected to keep rates on hold this week, leaving the key Bank Rate unchanged at 3.75%. Updated projections are likely to show a more benign inflation outlook in the UK, supporting the BoE's easing bias.

Finally, the Reserve Bank of Australia became the first G10 central bank to switch from easing rates to hiking them. On 3 February, it raised the cash rate target by 25bp, taking it to 3.85% on account of persistent inflationary pressure and a tight labour market.

The RBA gave hawkish forward guidance with the latest forecasts assuming 1-2 more rate increases this year, but inflation not returning to its target through the forecast period.

In our view, the RBA’s switch from easing to hiking does not represent the way ahead for other developed market central banks in the short term. We continue to expect the easing cycles in the US, Eurozone and UK to be extended further in coming months.