After partial government shutdowns delayed Friday's release, markets will digest January's non-farm payroll data on Wednesday and CPI data on Friday. Despite Warsh's nomination to succeed Powell, the Fed is still expected to cut rates twice in 2026. Following Warsh's nomination, the market has already priced in a reduced chance of the Fed starting rate cuts in June.

Expectations for January non-farm payrolls and CPI

General expectations indicate that the U.S. labor market is cooling, but remains robust. Economists surveyed expect Wednesday's nonfarm payroll data to show 70,000 new jobs added in January, a slight improvement from December's 50,000, but still indicating a slowdown in growth. The Wall Street Journal is even more conservative, predicting only 55,000. Most importantly, the unemployment rate is expected to remain stable at 4.4%, a level economists consider the "break-even point." As long as it remains stable, the economy is likely to avoid a recession.



However, risks may be tilted to the downside. White House economic advisor Hassett warned on Monday that job growth could be lower in the coming months, citing a “slightly lower employment figure consistent with high GDP growth and soaring productivity growth” as a headwind. On the inflation front, Friday’s CPI is expected to show further disinflation. Headline inflation is projected to fall to 2.5% from 2.7%, and core inflation is also expected to decline to 2.5%. This weak data will reinforce the argument that price pressures have finally stalled near the Fed’s target level, potentially prompting policymakers to cut interest rates before mid-year.

Unexpected events that could prevent the Federal Reserve from cutting interest rates twice

While this week's nonfarm payroll and inflation data will play a key role in long-term rate cut expectations, the broader fiscal outlook suggests that underlying economic strength could complicate the Federal Reserve's stance on rate cuts. Despite market concerns about an economic slowdown, Fed Governor Milan expects GDP growth to be 1% higher than current estimates, thanks to favorable tax policies and a changing regulatory environment. The next GDP data is scheduled for release on February 20.



Milan also dismissed concerns that the new trade policies would reignite inflation. He stated, "I see no substantial evidence that tariffs have already had serious inflationary consequences." He added that inflation on core imports was not significantly faster than on overall goods. This discrepancy between a potentially booming fiscal backdrop and a cooling labor market is causing headaches for traders. Therefore, if economic growth unexpectedly picks up as Milan predicts, the current expectation of two rate cuts in 2026 could be quickly ruled out.