Central Bank Watch: Fed Policy in Gridlock as Inflation Fighters Clash with Growth Doves

The narrative of a synchronized global easing cycle is fracturing as the Federal Reserve faces a renewed policy dilemma. Despite political pressure for rate cuts, the Fed is expected to hold rates steady this week, with the real battleground shifting to the trajectory for late 2025 and 2026.

The Stagflationary Trap

Data presents a contradictory picture:

• Labor Market: Shows signs of cooling, with unemployment ticking up to 4.4%.
• Inflation: Remains stubborn above the 2% target, with fears that further easing could reignite price growth.
• Diverging Forecasts: Investment banks are split. Goldman Sachs predicts cuts starting in June, bringing rates to 3.25%-3.5%. Conversely, JP Morgan economists warn that the Fed might remain on hold throughout 2026, or even be forced to hike in 2027 if inflation resurges.

Internal Dissension

The Fed's internal cohesion is fraying. Governor Michelle Bowman is leading a push for deregulation and a hawkish stance on inflation, clashing with the “transitory” camp. This internal friction, combined with the looming expiration of Chair Powell's term in May, adds a layer of institutional uncertainty.

Technicals

• The EUR/USD and GBP/USD may find support if the Fed signals a pause.
• The DXY (Dollar Index) fragility suggests the market is already pricing in a loss of yield advantage.
• Traders should watch the upcoming Dot Plot and statement language for clues on if higher for longer is ending.