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Hello and welcome to Notes in the Week Ahead, a JP Morgan Asset management podcast that provides insights on the markets and the economy to help you stay informed in the week ahead. Hello, this is David Kelly, I'm Chief strategist here at JP Morgan Asset Management. Today is January 26, 2026. Amidst a torrent of unsettling international and domestic events, the week ahead could be very consequential for the Federal Reserve. The FOMC will hold its first meeting of the year on Tuesday and Wednesday. While they likely leave interest rates on hold, any dissents on that decision and their commentary on the economic outlook will provide clues to the direction of short term interest rates in 2026 and beyond. In addition, this week the President is expected to announce his nominee for Fed Chair, the person who, presuming they are confirmed by the Senate, will lead the Fed over at least the next four years. However, most importantly, the week ahead should provide guidance on Fed independence. Two weeks ago, in an extraordinary statement and video, Jay Powell announced that the Fed had received subpoenas threatening a criminal indictment relating to Powell's testimony before the Senate Banking Committee concerning a project to renovate Fed office buildings. Powell asserted that the building's issue was just a pretext and what this was really about was, and I quotewhether the Fed will be able to continue to set interest rates based on evidence and economic conditions, or whether instead monetary policy will be directed by political pressure or intimidation, global investors will obviously be interested in further comments from Chairman Powell on this subject. So while it's important to consider what the Fed should do and will do this week, as well as who the President nominates to be the next Fed Chair, the overriding question is whether monetary policy will continue to be set by the Fed or whether the Fed will lose its independence with monetary decisions effectively being made by the Executive branch or Congress. In December, the Fed cut the Federal Funds Rate by 25 basis points to a range of 3.50% to 3.75%. This followed similar cuts in September and October and left the funds rate 1.75% below its level of the summer of 2024. At this point, there is a strong case for the Fed taking no further action for some time. First, the economy appears to be achieving steady economic growth. The Glanta Fed's GDP now model suggests a booming 5.4% real GDP growth rate for the fourth quarter 2025. We believe that this is exaggerated by very volatile trade data and that when the delayed Q4 2025 GDP report is released on February 20, it will show growth closer to 2% annualized for the quarter and 2.4% year over year. Still, that is solid growth, and with bumper income tax refunds due to be paid out in the weeks ahead, consumer spending should continue to power the economy forward well into the second half of the year. Of course, growth could slow due to another government shutdown or accelerated due to the payment of so called tariff rebate checks. However, the Fed will probably ignore these scenarios for now and looking at growth will have little reason to adjust interest rates in either direction. Turning to the labour market, the unemployment rate fell from 4.5% in November to 4.4% last month. Initial unemployment claims been very low in recent weeks. Job growth has been sluggish in recent months, and revisions to the payroll survey due out in early February and the household survey due out in early March could indicate even weaker job growth in recent months than initially reported. However, labor supply is being severely curtailed by sharp reversal in immigration over the past year. While job growth isn't strong, the labor market is tight in terms of the balance between supply and demand, and it is this issue that should be paramount in guiding Fed policy. The December CPI report showed year over year headline inflation of 2.7%, a modest improvement from the 3% seen in September. However, the government shutdown forced the Bureau of Labor Statistics to use partially outdated data on rental costs, which suggests that the 2.7% year over year reading is underestimating year over year inflation by about 1.10of a percent, a situation that will only be remedied by April. In addition, feed through effects from tariffs imposed last year, combined with larger income tax refunds could boost inflation to 3.5% year over year by June thereafter, inflation could fade. However, given that the economy is substantially closer to the Fed's unemployment goal of 4.2% than their inflation goal of 2.0%, it's hard to argue that the economy needs further monetary easing now. A second reason the Fed should hesitate to ease further is interest rates are simply not that high. In the 50 years before the great financial crisis, the federal funds rate averaged 1.84% above year over year core CPI inflation. This makes sense. Investors should expect to receive some positive real return for saving rather than consuming. However, we estimate that core CPI inflation will come in at 2.65% year over year for January, so that the current effective federal funds rate of 3.64% implies a real yield of less than 1%. Nor is this the only dimension of low interest rates in the 50 years before the financial crisis, the 10 year treasury bond yielded averaged 6.79%, 0.87% higher than the federal funds rate. This too makes sense. Investors should normally expect to be paid a better yield for lending money for 10 years compared to overnight. However, with 10 year yields currently 4.23%, they're only 0.59% above the federal funds rate. Finally, asset prices should give the Fed a reason to be cautious. While low interest rates in recent decades did little to boost economic growth, they did help fuel both the dot com bubble and the housing bubble. With stocks surging for more than three years and credit spreads tight, the Fed has every reason to be cautious about adding further liquidity to already frothy financial markets. So much for what the Fed should do. What about what will they do? Well, futures markets are currently pricing in just a 0.4% chance of a rate cut at this week's meeting and a 20% shot of a cut in March. For the year as a whole, markets are pricing in one rate cut with an 80% shot of a second by this time next year. Overall, this seems like a reasonable expectation, provided the Fed maintains the ability to set monetary policy based on economic conditions. It should be recognized, however, that if 1 the administration continues its tough stance on immigration, 2 the Supreme Court overturns some of the administration's tariffs and three the Democrats win back control of the House in November, potentially ending further bouts of fiscal stimulus, both real economic growth and inflation could sink below 2% entering 2027, potentially setting the stage for further monetary easing. In its press release, the FOMC may tweak the language around its assessment of labor market to acknowledge a recent lower unemployment rate and lower unemployment claims, but otherwise broadly maintain its messaging that economic activity is expanding at a moderate pace and inflation remains somewhat elevated. However, apart from this, the Fed's written communications are unlikely to surprise Governor Mirren may dissent again in favor of a further rate cut, but if he does so, he will likely be alone with all 11 of the other FOMC voting members favoring no change. The Chairman's press conference will be interesting, however, given the obvious political attention. Most likely J. Pal will try to focus on economic outlook on the rationale behind current monetary policy. However, given his statement from earlier this month, he may well indicate his intention to stay on the Federal Reserve Board of Governors until his term as governor expires in January 2028, even after his term as Fed Chairman comes to an end in May of this year. This brings us to the issue of who will be nominated to be the next Fed Chair. The President, in his first term, nominated Jerome Powell for the job and apparently regrets doing so. He will therefore presumably nominate someone who he feels is more likely to follow his guidance. That being said, it would be unfair to presume that the nominee, whoever they turn out to be, will merely do the President's bidding going forward. It's also possible the Senate Banking Committee or the full Senate would reject a nominee that it felt was either unqualified for the job or willing to surrender Fed Independence More importantly, however, it should be recognized that the very structure of the Federal Reserve mitigates against political interference. The 12 regional Federal Reserve bank presidents have always been somewhat independent of Washington and will likely maintain their independence going forward. The seven Fed governors serve in staggered 14 year terms, so one vacancy opens up every two years, provided the Supreme Court blocks the administration's attempts to fire Lisa Cook and Jerome Powell resists efforts to cajole him into resigning for the board. The President will only have the opportunity to pick one Fed governor between now and 2028, namely the seat currently being occupied by Governor Mehren. This is not a guarantee of Fed independence. If the administration succeeds in its efforts to remove Cook and Powell from the board, it may feel emboldened to try to replace the other governors, and it may succeed in doing so if the Senate acquiesces in that endeavor. However, there are too many ifs and mays in that statement to make it anything other than a long shot scenario. That being said, investors should not underestimate the importance of Fed independence. While the Fed has made many mistakes over the years, it has always, in my experience, tried to do only what a thought was in the interest of the long term health of the American economy. Same cannot be said for policymakers elsewhere in Washington, and investors would have every reason to fear the worst if the power to set monetary policy were transferred into the hands of those who thus far have only been the stewards of the federal finances and fiscal policy. Well, that's it for this week. Please tune in again next week and if you have any questions in the meantime, please reach out to your J.P. morgan representative.