What muni finance pros think
Don't expect a rate cut from the Federal Open Market Committee this week, analysts said, but they still expect the Fed will lower rates this year, and many speculated about the nomination of the next chair.
"We expect the Fed to leave the fed funds target unchanged at 3.50% to 3.75%" at the meeting,
Strong gross domestic product "could disrupt our outlook," he said, pushing the next rate cut to June. "Over time we are comfortable with a fed funds target of 3.00% to 3.25%, but this is dependent upon core inflation moving below 2.50% for a few months, which might be difficult if GDP growth exceeds expectations," Ragan said.
The market expectation is for no change in rates, he said, since Fed Chair Jerome Powell signaled "for now, the Fed is on hold and he believes the current fed funds target is in a 'broad range' of 'neutral value,'" he said "This suggests to us that the odds of a cut at the second meeting in 2026 (in March) are low as well."
With the Fed seeing upside risks to inflation and downside risk to labor, Ragan said, it "creates a challenging position for Fed policy and gives support to waiting for more data."
Since the previous meeting inflation reports showed more stability "than many inflation hawks had predicted," he noted, with nonfarm payrolls averaging 53,000 jobs added a month, with the unemployment rate ending at 4.4%, where it was in September.
"Tame inflation and surprisingly strong fourth-quarter 2025 GDP will keep the Fed on hold," Ragan said.
"The Federal Reserve appears comfortable staying on hold for now," said
Inflation will "remain above the Fed's 2% target, given the structural geopolitical shifts but should not spike as productivity increases," he said. "Interest rates should remain rangebound this year, oscillating between higher rate drivers, like solid economic growth, and lower rate drivers, like Fed policy."
Balance and diversification should guide investors, Welch said. "We recommend a healthy weighting to high quality core bonds but also some exposure to sectors not represented in the Aggregate Bond Index such a CLOs, securitized debt, and even some near-term higher yield bonds. These should not be the lion's share of your bond portfolio, but they can serve as a useful diversifier if yields rise."
The post-meeting statement and the Powell press conference will likely "signal maximum flexibility as the committee strives to keep its options open," said Wells Fargo senior economists Sarah House and Michael Pugliese and Chief Economist Tom Porcelli.
While they also expect two cuts this year, "the risks to our forecast look increasingly skewed toward later and possibly less easing this year. In fact, given our view on how economic growth will evolve this year, there is a sound argument that the longer the FOMC waits to cut, the higher the hurdle becomes to justify on economic grounds the need to ease further."
Most FOMC members are "comfortable with the Fed on hold," said FHN Financial Chief Economist Chris Low, therefore communication "will focus on how that could change going forward."
Powell will likely "acknowledge the Fed is still tilted toward cutting rates but waiting for data to confirm inflation and employment are on the right track."
A March cut remains his base case, but "it depends on what inflation does in the next few months."
The Fed will remain on hold, said Olu Sonola, Fitch Ratings head of U.S. economic research. "Inflation looks stuck: PCE isn't converging back to target, but it's also not re-accelerating on tariff-driven pressures."
Consumers remain resilient "even as income growth cools further and wage gains skew higher-income — reinforcing the K-shaped narrative. This keeps the Fed in a 'hold' posture — policy likely stays restrictive for longer until inflation shows more convincing progress back toward target."
Although the Fed is probably nearing the end of its rate-cutting cycle, said Mona Mahajan, head of investment strategy at Edward Jones, the base case is one or two cuts this year, as the Fed attempts to lower rates to a neutral level, typically "about 100 basis points above inflation."
Morgan Stanley economists "expect the Fed to deliver a 'dovish hold.'"
Recent labor market stabilization "may be enough to justify a pause, but potential disinflation later this year should mean the Fed maintains an easing bias," they said.
"The key question at this meeting will be how Powell communicates the pause: is it a 'dovish hold' in which he continues to emphasize that the outlook supports further rate cuts, or will Powell signal a more durable pause? We expect the former," they said.
New chair
Speculation continues to fly regarding the choice of the next Fed chair, with Powell's term ending in May.
"Suddenly, Kevin Hassett, currently the director of the National Economic Council, no longer appeared to be the favorite for the role," Interactive Brokers Chief Strategist Steve Sosnick said.
Kevin Warsh appeared to be the frontrunner, but now BlackRock's Rick Rieder seems to be the favorite.
"It's not clear that the potential change in the Fed leadership horse race is leading to a meaningful set of reactions in stocks and bonds," Sosnick said.
"Rieder absolutely has market acumen, probably more than most of the names getting floated around right now," said Dean Lyulkin, founder of The Dean's List. "He's spent his career in the bond market where monetary policy actually hits first — watching liquidity tighten, credit crack, and risk get repriced in real time. That's a very different skill set than running regressions after the fact or giving speeches about what the Fed should have done last year. You don't manage trillions through multiple crises without developing a sharp instinct for when policy is breaking something."
As a Wall Street insider, the choice of Rieder could raise questions about conflicts, Lyulkin said. "But it's hard to seriously argue that the people who allocate capital for a living want to see the economy burn. Quite the opposite — stability, growth, and functioning markets are literally their business model."
KBRA Chief Strategist Van Hesser said investors need not worry about "a material loss of Fed independence."
When Powell leaves, he expects "voting members [will] feel compelled to vote their conscience. On the surface, we applaud what we believe will be greater transparency."
Many votes are unanimous, but Hesser asked, "Does anyone actually believe there are essentially no dissents, that everyone is in agreement with the chair's view all the time?"
And,
Hesser believes this would strengthen Fed independence. "The president can install — with Senate approval — a chair whose view on rates is consistent with his own, but that by no means means he or she will have the votes to push across the chair's view."
One caveat, he said, is the upcoming Supreme Court ruling on the Lisa Cook case.
Assuming the court upholds the need for cause to fire a Fed governor, Hesser said, "a president would be prevented from making wholesale changes at the FOMC to suit his wishes."
The announcement could be imminent, and D.A. Davidson's Ragan said he "would not be surprised to see the nomination concurrent with [the] FOMC meeting."
The nomination "could disrupt the bond market (lower short-term rates and higher long-term rates) as a new nominee will initially be viewed as more dovish (no matter who the nominee is). But the market reaction will be temporary as all nominees are respected and have discussed the importance of remaining independent."
Don't expect Powell to address any nominees or his future plans, Ragan said. Powell could "soften" his stance on whether labor market weakness outweighs inflation concerns as GDP trends are strong, he said.
As for Fed independence, Edward Jones' Mahajan said, "If the market gets a sense that Fed independence is being questioned or challenged, not only could you see market volatility, but you'll probably see rates rise on the long end as that risk premium gets baked in. That is squarely opposite of what this administration wants."
