From the studio

Video: The AI Show: Our tech outlook for 2026 (4 mins)
Podcast: Themis Themistocleous on Eurozone's bright outlook | | (18 mins)

Thought of the day

US stocks and bonds rebounded from early losses on Monday, despite the investigation by the Department of Justice into Federal Reserve Chair Jerome Powell. The S&P 500 rose 0.2% to a fresh all-time high, and the yield on the 10-year US Treasury held below 4.2%.

The market reaction is consistent with our view that the investigation does not materially alter the likely path for Fed easing this year. While it adds additional uncertainty over the timeline of potential changes in Fed leadership, we expect monetary policy to continue to be shaped by the health of the US economy, with today’s inflation data a key focus.

Pushback from Congress and the long tenure of Fed board members suggest that any changes to the central bank’s policymaking framework should be gradual. The Senate plays a key role in personnel outcomes by confirming the nominations of future governors and the next Fed chair, and multiple Republican lawmakers have voiced their concerns over the probe. Senator Thom Tillis, a key Republican on the Banking Committee, said he would oppose the confirmation of any nominees until the investigation is resolved. Senate Majority Leader John Thune also said the threat of a legal battle with the US central bank could make confirming Fed nominees “challenging.” The Supreme Court’s scheduled hearing on Governor Lisa Cook’s criminal investigation on 21 January may add a layer of complexity, while Powell’s term as a board member does not expire until 2028.

Inflation is likely to stay contained, allowing the Fed to focus on employment risks. The December consumer price index reading due today could point to a renewed acceleration in core inflation, but we think this will likely be the result of an unwinding of prior distortions related to the government shutdown and the unusual timing of holiday discounts by companies. We maintain the view that inflation—though above the Fed’s target—should not be a barrier to central bank easing. Shelter cost pressure has been on a downward trajectory, while wage inflation is easing from the slack in the labor market.

Additional evidence of labor market weakness should result in a rate reduction by the end of this quarter. While the unemployment rate in December reversed its recent uptick and Fed communication has implied a higher bar for additional cuts, the Fed’s labor market concerns should remain elevated amid slower job growth in the private sector. The latest available data also showed that the ratio of job openings to unemployed workers fell to the weakest level since early 2021. We expect the labor market to remain weak, and two additional payroll reports ahead of the March policy meeting are likely to be followed by a 25-basis-point interest rate cut.

So, we maintain the view that further Fed easing remains in store, which should continue to support stocks, quality bonds, and gold.