US stocks rallied at the start of the week ahead of the Federal Reserve’s January meeting. Despite a 97% probability that interest rates would be left unchanged, US stocks moved higher due to the growing confidence that the next move in US interest rates will be down, not up. The rally was also supported by the upcoming US earnings season, which occurs quarterly and remains a key driver of market sentiment.
Despite confirmation, markets continued to move ahead before the meeting, trading on probabilities rather than formal announcements. Investors appear focused less on what the Fed did this week and more on what it may be forced to do later in the year.
While the Fed ultimately left rates unchanged (as expected), uncertainty around future monetary policy has intensified with scrutiny over the Fed’s independence. President Trump has publicly pressured the Federal Reserve to cut rates, while Chair Jerome Powell has resisted such demands in an effort to preserve the Fed’s long-standing commitment to policy independence. Trump has endorsed Kevin Warsh, a former governor of the Fed to be Powell’s successor when his term ends in May, adding further uncertainty to the Fed and US politics.
For Australians, rate changes in the US remain highly relevant. US interest rate expectations are heavily reflected into the ASX and investor sentiment, especially in Australian superannuation funds due to their significant exposure in US stocks. As uncertainty around US monetary policy persists, both Australian markets and the RBA will be watching closely.
