Fed Watch – 1/23/2026

The below transcript is a literal translation of the podcast audio that has been machine generated by Notta.

Hi, I’m Lauren Saidel-Baker, and thank you so much for joining me for this January 23rd edition of FedWatch. Well, after a very volatile week last week, the markets really shrugged off these new questions of Fed independence.

But if you missed it, Brian Beaulieu recorded a special edition of FedWatch last Tuesday. I’d really encourage you to go back and see what he said about Fed independence, why it matters so much. But I do want to delve in a little bit deeper this week into what these questions are and really why they matter to markets.

So there are two different cases at play with regard to Fed Independence. The first one came to a head this week with the Supreme Court hearing arguments on Lisa Cook. Now, if you remember back months ago, Trump tried to fire Governor Cook from her position on the Fed over perceived mortgage irregularities.

Now, these occurred before she was even a Fed governor. There’s a lot of nuance between the case, but really the question here is if the president has the ability to fire a Fed governor for cause, as they say.

And this cause, again, had nothing to do with her performing her job at the Fed, but it was something on the personal front of her life. So this week we did hear those Supreme Court arguments. The reading of the tea leaves suggests that even very conservative justices are skeptical of the Trump administration’s claims that they should be able to fire Fed governors, especially for a reason such as this.

In past decisions where they have eroded other agencies’ independence, they’ve been very careful to carve the Fed out. In fact, sometimes even stating the Federal Reserve by name. So there seems, again, at least on this initial read, to be a willingness on the part of the Supreme Court to preserve Fed independence, to not extend that presidential reach.

But back to last week’s news, these DOJ subpoenas about the recent building renovations at the Federal Reserve. Again, the markets were pretty benign. We did not see a strong reaction. Maybe that’s more of a signal of how successful this case will be.

But that will not continue if Fed independence is materially threatened. If it looks like we are going to get a more pliant Fed who even through their own perceived decision making is following more of this political whims.

That is going to rattle markets. Fed independence is the biggest risk that we face this year with regard to interest rate policy. I want to remind you, all politicians are very likely looking for lower interest rates in the short term.

What that does is it juices economic growth, right? It lowers perceived borrowing costs. It’s a good thing for a quick hit of economic growth that makes their poll numbers certainly look better. But what does this mean longer term?

With those rate cuts, if they’re not merited by the overall economic reality, well, that brings up the risk of higher inflation. We’ve seen an inflationary cycle. We can look back to prior feds and see what this looks like when inflation does, in fact, get too high and not to a controllable degree.

So what the bond market perceives with these independence questions and with the perception of lower rates than we should have otherwise is higher inflation risk. And what does the bond market need if inflation risk is higher?

Well, they need to be paid more. So in a very perverse way, longer term rates, those that are again set by market supply and demand dynamics, those could even go up with these independence risks with lower short-term rates.

So the things that mortgages are based on or a lot of corporate borrowing costs, even most of our government’s long-term debt, those are tied to long-term rates, not to the short-term, not to the federal funds rate.

We’ve seen something of a dislocation in this market already. We’re not seeing those long-term rates or even those actual borrowing costs really move in lockstep with Fed cuts recently. Bringing up Fed cuts, the meeting is next week, 27th and 28th.

We will get additional messaging from the Fed. We do not expect a Fed cut in next week’s meeting. To be absolutely clear, January will be a hold. We’re still looking potentially for another cut later this year, but is that 25 basis points really going to move the needle?

Certainly not in the broader umbrella of these more existential questions. But as always, we’ll be unpacking that additional Fed information that we get from their meeting next week. And we hope you’ll stay with us right here on Fed Watch.