The U.S. inflation rate has fallen sharply to 1.16%, significantly undershooting the Federal Reserve's long-standing 2% target. This dramatic cooling of price growth places Fed Chair Jerome Powell in a precarious position, forcing a critical decision between maintaining high interest rates—risking economic slowdown—or pivoting to rate cuts to stimulate growth.
The central bank has spent the last two years in an aggressive tightening cycle to combat inflation. With inflation now well under control, the current monetary policy stance appears increasingly misaligned with economic conditions. The 2% target is a central pillar of U.S. monetary policy, designed to balance growth and price stability. Falling too far below this mark can signal weakening demand and heighten deflation risks.
Markets are now anticipating rate cuts sooner than previously forecast, potentially as early as the next Federal Open Market Committee (FOMC) meeting. However, the immediate meeting concluding on January 29, 2026, is expected to result in no change, with markets pricing in a 97% probability that rates will remain steady at 3.5% to 3.75%. The focus will instead be on Powell's post-meeting press conference for hints on the future policy timeline.
Political pressure on the Fed is intensifying. President Donald Trump has repeatedly criticized the central bank for not cutting rates faster. This tension is compounded by a Department of Justice investigation into Fed headquarters renovations, which Powell has called a pretext to pressure the bank. Furthermore, Trump is expected to name Powell's successor soon, as his term as chair expires in May.
From a market perspective, lower inflation typically paves the way for rate cuts, which weaken the U.S. dollar and boost risk assets like cryptocurrencies. If cuts materialize, crypto markets could benefit from increased liquidity and renewed investor appetite. The crypto market is watching closely, with Bitcoin holding around $87,000 and the overall market up 1% in the past 24 hours ahead of the FOMC decision.
