Fed holds steady amid rising labor concerns
The Fed signals caution with two dissents for cuts, Canada stays on hold, Japan confronts yen volatility and fiscal debate, and Australia faces sticky inflation as markets price further tightening.
Weekly highlights
Hold; 2 dissents for a cut
Sharp, broad, declines
Slightly better than expected
As widely expected
Modestly below expectations
Third consecutive decline
Payback after two solid rises
Setting up a possible hike.
Why we expect RBA to hold
US: Dovish hold, hawkish nomination?
As widely anticipated, the FOMC held the Fed Funds rate steady at 3.50-3.75% at the January meeting. Still, the decision was not without some surprises, the most important of which was that there was not one (Gov. Miran) but two (Gov. Waller) votes in favor of a 25-bp cut. In a statement explaining his dissent, Governor Waller emphasized downside labor market risks in a rather emphatic manner:
In a statement explaining his dissent, Governor Waller emphasized downside labor market risks in a rather emphatic manner: “Compared to the prior ten‑year average of about 1.9 million jobs created per year, payrolls increased just under 600,000 for 2025. And, last year's data will be revised downward soon to likely show that there was virtually no growth in payroll employment in 2025. Zero. Zip. Nada. […] Let this sink in for a moment—zero job growth versus an average of almost 2 million for the 10 years prior to 2025. This does not remotely look like a healthy labor market.”
We have a lot of sympathy for this viewpoint, which is why our baseline expectation is for three Fed rate cuts this year. If anything, the latest Conference Board consumer confidence data highlights these risks.
The labor differential, which measures the difference between the share of respondents saying jobs are “plentiful” and those who say jobs are “hard to get,” plunged 5.3 points to 3.1, the lowest level since February 2021.
The two measures are now very close to crossing over each other in a manner that in the past has signaled broader economic troubles. The labor market remains the prominent issue to watch over the next few months.
In separate news, President Trump nominated Kevin Warsh for Federal Reserve Chair, an announcement that triggered deep selloffs in dollar debasement plays like gold and silver on the basis of more hawkish policy expectations.
However, the reaction may be overstated, given that the fragile labor market conditions support some further easing irrespective of who the new Fed Chair is.
Canada: BoC remains on hold
The Bank of Canada held rates at 2.25% as expected, with inflation and growth aligning with its forecasts.
Growth and inflation projections have remained largely unchanged since October, but uncertainty overshadows the economic outlook. The latest Monetary Policy Report indicates that tariffs and persistent uncertainty are expected to weigh on the economy, with growth projected at 1.1% in 2026 and 1.5% in 2027.
Inflation is expected to decline gradually as the impact of last year’s GST/HST holiday diminishes. The Bank projects inflation will remain close to the 2% target, with tariff costs offset by excess supply.
The release also stated that the current policy rate is deemed appropriate, but significant uncertainty makes it challenging to forecast the timing or direction of future rate adjustments.
The bank statement underscored the prevailing uncertainty and emphasized a data‑driven approach in light of the upcoming USCMA review and global developments. We expect that the BoC will maintain its current policy stance, as weaker growth continues to support the ongoing easing of inflation.
Japan: Yen moves & fiscal debate
Japan’s bond markets remained in focus last week as the yen experienced sharp intraday moves. The currency initially strengthened rapidly on rumors of a so‑called “rate check” by the Federal Reserve Bank of New York—a step that is typically seen as a precursor to official intervention by Japanese authorities to support the yen.
Such coordination has not occurred for more than a decade, leading market participants to speculate briefly about a joint intervention between Japan and the United States. However, expectations were quickly tempered after U.S. Treasury Secretary Scott Bessent stated that the United States was “absolutely not” intervening in currency markets.
Adding to this, the U.S. Treasury Department removed its call for the Bank of Japan to raise interest rates in its semiannual report released last week. Following these comments, the yen settled at around 154.73, though it remains in focus given its continued weakness despite improving fundamentals.
At the same time, Japan’s fiscal outlook has attracted renewed attention. With both the ruling coalition and opposition parties advocating for the elimination of the consumption tax on food, fiscal policy has emerged as a key political issue ahead of elections.
Given that Japanese households spend roughly 30% of their income on food, the proposal resonates strongly with voters. However, consumption tax revenues from food are estimated at around ¥5 trillion, accounting for 15–17% of total consumption tax receipts and approximately 6–7% of overall tax revenue.
While 6–7% of tax revenue is arguably too large to eliminate without consequence, it is also small enough to offset through alternative financing measures. Investors, however, appear to be viewing these developments through the lens of Japan's already high public debt.
The upcoming elections are therefore significant not only for Japan but also for global markets. Any material fiscal slippage or political instability—while not our base case—could have far reaching implications for global bond yields. Our central expectation is that Prime Minister Takaichi will consolidate her mandate, with the Liberal Democratic Party potentially increasing its seat count in the Lower House. Whether a coalition partner will be required to secure a majority remains uncertain until the results are announced. Nevertheless, there is a good chance that recent market turbulence will subside sooner than currently feared.
Eventually, the yen may remain at the weaker end of the spectrum which might revive the debate on whether the BoJ may raise rates twice this year or not (we expect one). The critical factor is that inflation will continue easing this year, as was evident in the January Tokyo CPI data released last week as the BoJ core (excluding fresh food and energy) eased for a second month to 2.4% YoY. So, the BoJ has no real urgency to hike or hike twice this year, but the yen will continue to influence markets even as dust settles after the elections.
Australia: Fully priced
Inflation delivered another unpleasant surprise in Q4. The trimmed‑mean measure rose to 3.4% YoY 0.90.9% QoQ0.9, coming in a tenth above our expectation.
Headline inflation was also uncomfortably high at 3.8% for the quarter, though broadly in line with the Reserve Bank of Australia’s sequential forecast.
Australia’s inflation data is in transition from a quarterly to monthly frequency, creating distortions—particularly due to uneven uptake of electricity rebates by households.
The December monthly trimmed‑mean rose by 0.2% MoM and 0.8% on a three‑month annualized basis, while easing to 3.3% YoY. This suggests inflation is gradually moving closer to target on a monthly basis.
The composition of data was somewhat encouraging as sequential price growth eased in housing 0.10.1%0.1 and several durable goods categories.
Markets are pricing a 75% probability that the RBA will raise the cash rate by 25 bps next week. However, we expect the Bank to hold rates while delivering hawkish guidance.
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There's more to the Weekly Economic Perspectives in PDF. Take a look at our Week in Review table – a short and sweet summary of the major data releases and the key developments to look out for next week.