Podcast Summary: Notes on the Week Ahead

Host: Dr. David Kelly
Episode: The Direction of the Fed
Date: January 26, 2026

Episode Overview

In this episode, Dr. David Kelly delves into a pivotal week for the Federal Reserve, exploring the implications of the upcoming FOMC meeting, the expected nomination of a new Fed Chair, and, most importantly, the growing debate over Fed independence amid emerging political pressures. Dr. Kelly connects recent policy moves, economic data, and political drama, offering insights into what these events mean for markets and monetary policy into 2026 and beyond.

Key Discussion Points & Insights

1. The Significance of This Week for the Fed

• First FOMC Meeting of the Year:
  The FOMC is not expected to change interest rates, but dissents and the accompanying commentary will offer clues for short-term rate direction.
• Nomination of a New Fed Chair:
  The President is likely to announce his nominee this week, impacting the leadership and potentially the direction of the Fed.

2. Fed Independence Under Threat

• Powell Subpoena & Political Pressure:
  Jay Powell recently revealed subpoenas and threats of criminal indictment related to his Senate testimony on Fed building renovations—a situation he frames as a pretext for undermining Fed independence.

  • Quote:

    “What this was really about was... whether 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.”
    — Dr. David Kelly (02:03)

• Importance Highlighted:
  Dr. Kelly stresses the critical question for investors: will monetary policy remain with the Fed, or become subject to executive or legislative interference?

3. Economic Backdrop and Fed Policy

• Current Stance:
  The Fed has cut rates several times recently, leaving the Federal Funds Rate at 3.50%–3.75% (04:20).

• Economic Growth:

  • The Atlanta Fed’s GDPNow suggests 5.4% real Q4 growth, but Dr. Kelly downplays this figure, predicting an official rate closer to 2% when released in February (06:13).
  • Consumer spending remains robust, helped by upcoming income tax refunds.

• Risks to Growth:

  • Possibility of a government shutdown
  • Impact from tariff rebate checks
  • The Fed is likely to disregard these scenarios for now.

4. Labor Market and Inflation

• Labor Market:

  • Unemployment fell from 4.5% to 4.4% (08:15).
  • Job growth is sluggish, but supply is constrained due to lower immigration.
  • The key for the Fed: a tight labor market despite modest job additions.

• Inflation:

  • December CPI: 2.7% YoY inflation, but likely understated due to data issues during government shutdown (09:15).

    • "2.7% year over year reading is underestimating year over year inflation by about 1/10 of a percent..."
      — Dr. David Kelly (09:32)

  • Inflation could spike to 3.5% by June (due to tariffs and refunds), then recede.

  • The economy is nearer to meeting the Fed’s unemployment objective (4.2%) than the inflation goal (2.0%).

5. Rationale Against Further Rate Cuts

• Interest Rate Levels:
  • Real rates are already low versus historical norms.
  • Federal Funds Rate provides less than 1% real yield (12:40).
  • 10-year Treasury yields are only modestly above overnight rates.
• Asset Markets:
  • Prolonged easy money risks overheating: “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.” (14:15)

6. What the Fed Will Do: Market Expectations

• Rate Cut Odds:

  • Futures put the chance of a rate cut this meeting near zero, with only a 20% chance in March.
  • Markets expect one or, at most, two cuts in 2026, barring political interference (15:35).

• Possible Scenario:
  Changes to immigration, tariffs, or control of the House could pull real growth and inflation below 2% in 2027, creating room for more easing.

7. Communication and Internal Fed Dynamics

• FOMC Statement:
  • Likely to adjust labor market language slightly but mostly maintain the message of steady growth and persistent inflation.
  • Governor Mirren may be the sole dissent in favor of a cut (17:40).
• Powell’s Press Conference:
  • Expected to emphasize the economic outlook and guardedly address political pressure.
  • Powell may signal intent to remain a Fed Governor until 2028, even if replaced as Chair in May (18:52).

8. The Next Fed Chair: Nomination Dynamics

• Political Calculus:

  • The President is expected to nominate someone more “in alignment” with his policies than Powell.
  • The nominee’s independence cannot be assumed, but the structure of the Fed (with staggered, lengthy terms) mitigates immediate risk of politicization.
  • The Senate could push back against a nominee seen as unqualified or lacking independence.

• Fed Structure as Safeguard:

  • 12 regional Fed presidents and staggered 14-year governor terms provide protection.
  • Administration’s ability to reshape the Fed quickly is limited unless successful in removing current governors—an unlikely “long shot scenario.” (22:20)

Notable Quotes & Memorable Moments

• On the nature of the political threat to the Fed:

  “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.”
  — Dr. David Kelly (24:22)

• On recent inflation data reliability:

  “The Bureau of Labor Statistics had 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 one tenth of a percent... a situation that will only be remedied by April.”
  — Dr. David Kelly (09:32)

• On the real meaning of Powell’s legal troubles:

  “Powell asserted that the building's issue was just a pretext and what this was really about was... whether 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.”
  — Dr. David Kelly (02:03)

Timestamps for Important Segments

• Fed’s Big Week & Powell’s Subpoena – 00:04–03:30
• Economic Growth, GDP Outlook – 05:20–07:40
• Labor Market Trends & Immigration Constraints – 08:15–10:10
• Inflation Data and Risks – 09:15–11:15
• Interest Rates versus Historical Norms – 12:40–14:30
• Asset Markets & Caution – 14:15–15:10
• Market Expectations for Rate Cuts – 15:35–17:10
• FOMC Meeting, Possible Dissents, Press Conference – 17:40–19:05
• The Nomination and Safeguards of Fed Independence – 20:20–23:40
• Final Thoughts on the Importance of Fed Independence – 24:00–24:52

Summary Takeaway

Dr. Kelly frames this as a consequential week for the Fed, not because of likely policy change, but due to questions over the institution's independence amid unprecedented political and legal pressure. While economic fundamentals support a wait-and-see stance, the larger question—who sets monetary policy—overshadows the week’s events. Investors should be alert not only to market signals, but also to evolving dynamics surrounding the Fed’s leadership and autonomy.