The Federal Reserve is expected to keep interest rates unchanged while maintaining its hawkish stance from December. Investors, including those in the cryptocurrency market, will closely monitor Chairman Jerome Powell’s remarks on key economic concerns such as mass deportations and shelter inflation. The rate decision is set for release at 19:00 UTC on Wednesday, followed by Powell’s press conference at 19:30 UTC.
The Fed’s current target range for interest rates stands at 4.25% to 4.5%, reflecting a 100 basis point reduction since September. While the central bank implemented a 25 basis point cut in December, its accompanying statements signaled a cautious approach to further rate reductions in 2025. This stance led to a downturn in risk assets, including bitcoin (BTC).
However, market analysts generally view Wednesday’s meeting as a non-event, with expectations that policymakers will hold rates steady while reaffirming their hawkish guidance from December.
“We doubt this week’s FOMC meeting will significantly impact the markets, as the decision to maintain rates has been well communicated since December. Meeting minutes revealed that participants have already factored in some preliminary assumptions regarding Trump’s policies, but given the uncertainty, Powell is unlikely to provide strong guidance,” Danske Bank stated in a client note on Tuesday.
Despite the expected steadiness in rate policy, Powell’s responses to key economic concerns could influence market sentiment.
Impact of Mass Deportations on Labor Market and Inflation
President Donald Trump has begun fulfilling his campaign pledge to deport illegal immigrants, with flights reportedly underway. Estimates suggest that total deportations could range from one million to ten million people.
Economists argue that large-scale deportations could tighten the labor market, driving inflation upward. If Powell acknowledges this potential impact, it could reduce market expectations for rate cuts and put pressure on risk assets.
“The removal of up to one million workers from the U.S. labor force would be a significant factor. Given the strength of December’s payroll report, a tighter labor market would exert further pressure on employment conditions, keeping the unemployment rate near full-employment levels,” noted Rabobank’s Senior Macro Strategist Benjamin Picton.
“This scenario is inherently inflationary, even before factoring in the additional effects of tax cuts and tariffs,” Picton added.
U.S. Debt Ceiling and Market Liquidity
The U.S. recently hit its self-imposed debt ceiling of $36 trillion, prompting the Treasury to deploy emergency measures to sustain government operations. One such measure involves drawing down the Treasury General Account (TGA), the government’s checking account at the Fed.
TGA spending typically injects liquidity into financial markets, encouraging risk-taking. This could partially offset the Federal Reserve’s ongoing quantitative tightening (QT) efforts aimed at reducing its balance sheet. Powell may address this issue but is likely to avoid signaling a dovish stance that could further fuel risk asset rallies.
Trends in Rent Inflation and CPI Impact
Leading indicators suggest that shelter inflation, a key component of the Consumer Price Index (CPI), is moderating.
“The Labor Department’s ‘all tenant rent’ index, which serves as a leading indicator for shelter inflation in the CPI, rose at a significantly slower pace last quarter. It increased by 3.2% year-over-year in Q4, compared to 3.9% in Q3 and 5.5% a year ago. This is close to the pre-pandemic average of 3.1% between 2017 and 2019,” noted Wall Street Journal Chief Economic Correspondent Nick Timaros.
If Powell acknowledges this disinflationary trend, risk assets—including stocks and cryptocurrencies—could see a rally.
Conclusion
While the Federal Reserve is unlikely to make any major policy shifts during Wednesday’s meeting, Powell’s commentary on deportations, labor market conditions, liquidity injections from TGA spending, and inflation trends could shape market movements. Investors will be keenly watching for any signals that might influence expectations for rate adjustments in the coming months.
