Fed Governors Signal Prolonged Rate Hold, Hawkish Tilt Intensifies Amid Slowing Consumption, Weak Hiring, and a Softening Dollar

Cooling inflation without signs of a rebound in consumption or employment
AI-driven shifts in labor structure and tariff-related uncertainty accumulate
Eroding demand for Treasuries and weakening confidence in the dollar further constrain rate cuts

Within the U.S. Federal Reserve, a clear bias toward maintaining the policy rate is taking hold. Although inflation has eased from its peak, neither consumption nor employment has shown recovery signals sufficient to justify monetary easing. At the same time, uncertainty is intensifying as structural changes in the labor market driven by artificial intelligence adoption intersect with the lagged inflationary effects of tariff policy. Adding to the headwinds, weakening global demand for U.S. Treasuries is beginning to undermine confidence in the dollar, further complicating the case for rate cuts.

Logan, Hammack Signal ‘Rate Hold’ for the Time Being

On the 10th, Lorie Logan, President of the Federal Reserve Bank of Dallas, said at a public event in Austin, Texas, that “our policy is in a good place to respond to risks to either side of the Federal Open Market Committee’s dual mandate of price stability and maximum employment.” In prepared remarks, she added that “over the coming months, we will be able to assess whether inflation is continuing to move toward our target and whether the labor market remains on solid footing,” noting that “if so, that would suggest further rate cuts may not be necessary.”

She continued, “If instead inflation falls more rapidly or the labor market shows meaningful additional cooling, then further rate cuts could become appropriate,” but cautioned that “at present, I am more concerned about the possibility that inflation remains stubbornly elevated.” In other words, inflation risks outweigh concerns about labor market cooling. Logan also voted in favor of holding rates steady at the January FOMC meeting.

Beth Hammack, President of the Federal Reserve Bank of Cleveland, echoed that stance the same day at a regional banking event in Ohio. “Maintaining the policy rate at its current level while observing how conditions evolve is the appropriate course,” she said. Hammack explained that “by many estimates, including my own, the current policy rate is near the neutral rate,” adding that “this implies policy is not exerting a meaningful drag on the economy.” The neutral rate refers to the real interest rate consistent with maximum employment and stable inflation.

Hammack further noted that she supported holding rates at the FOMC meeting two weeks earlier, emphasizing that “we are well positioned to maintain the current stance and watch how the economy unfolds.” She added that she prefers “leaning toward patience—assessing the effects of recent rate cuts and monitoring economic performance—rather than attempting fine-tuning,” concluding that “under my outlook, we could hold rates steady for quite some time.”

Heightened Economic Uncertainty

While inflation in the United States has moderated from its peak, underlying real-economy conditions still offer little justification for rate cuts. According to the Bureau of Labor Statistics, core consumer prices excluding food and energy rose 0.2% month on month and 2.6% year on year in December. The monthly increase undershot market expectations of 0.3%, and the annual rate marked the lowest level since 2021. Headline consumer prices rose 0.3% from the prior month and 2.7% year on year, in line with Dow Jones consensus estimates.

Despite easing inflation, retail sales remain stagnant. Data from the U.S. Commerce Department showed that December retail sales totaled approximately $781 billion, unchanged from the prior month and well below the 0.4% growth expected by economists surveyed by Dow Jones. Core retail sales, the so-called control group used in calculating personal consumption expenditures for GDP, declined 0.1% month on month. Given that consumer prices were up 2.7% year on year in December, the data suggest that real retail sales likely fell from a year earlier. Even during the year’s peak consumption period, U.S. consumers tightened their wallets.

Some on Wall Street attribute the weakening consumption trend to deteriorating household purchasing power amid sluggish job creation tied to AI adoption. Scott Anderson, Chief Economist at BMO Capital Markets, said that “this year’s annual benchmark revisions will carry far greater significance than usual,” adding that “the U.S. labor market appears to be balancing on a knife’s edge between AI-driven net job growth and outright job losses.”

Market expectations also lean toward further labor market cooling. Forecasts for the January employment report, due on the 11th, point to job gains of 69,000 and an unemployment rate of 4.4%. While slightly below the 4.5% peak recorded last November, this would still represent elevated joblessness. The release will also include revisions to past data, with employment figures for the 12 months through March 2025 expected to be revised sharply lower. Even in the final print, job growth is widely expected to be materially pared back. Overall, the U.S. labor market has entered what economists commonly describe as a “low-hire, low-fire” environment, marking a phase of gradual deceleration.

Crucially, the inflationary pass-through from tariff policy has yet to be fully reflected in economic indicators. Because cost pass-through from tariffs accumulates with a lag, the ultimate impact remains difficult to gauge at this stage. Ira Kalish, Chief Global Economist at Deloitte, noted that “inflation has remained relatively contained so far because companies have passed on only about 10% of tariff costs to consumers.” He added that while firms initially absorbed tariff costs under the assumption that tariffs would be temporary, that strategy will become increasingly difficult to sustain if tariffs are perceived as long-lasting. Against this backdrop, a premature rate cut could risk reigniting inflationary pressures.

China’s ‘Cut Losses’ on Treasuries Raises Dollar Hegemony Risks

A more pressing concern lies in the decline in global demand for U.S. Treasuries and the resulting soft-dollar trend. China’s strategic reduction of its Treasury holdings, effectively “cutting losses,” is emerging as a tangible threat to dollar dominance. According to Bloomberg, citing sources familiar with the matter, the Chinese government on the 9th asked banks to limit new purchases of U.S. Treasuries and instructed institutions with high exposure to reduce existing holdings.

Markets reacted swiftly. The yield on the 10-year Treasury briefly rose by 4 basis points to 4.25% before paring gains, trading about 1 basis point higher by 9:10 a.m. Eastern time. The 30-year yield climbed to 4.88% before easing to around 4.873%. The dollar weakened as well, with the Bloomberg Dollar Spot Index falling nearly 0.7%.

China’s drawdown of Treasury holdings has already advanced significantly. U.S. government data show that Chinese investors held approximately $726 billion in Treasuries, down by roughly half from the peak of about $1.40 trillion at the end of 2013 and the lowest level since the aftermath of the global financial crisis in 2008. Beijing has framed the move as a diversification strategy, but markets increasingly view it as part of a broader erosion of global confidence in U.S. assets.

China is not alone. India, Brazil, and other countries are also gradually reducing exposure to the world’s largest bond market. Combined with rising geopolitical risks, including recent remarks by President Donald Trump regarding Greenland, capital is increasingly flowing toward alternative assets such as gold. Wall Street expects the shift away from dollar-denominated assets to persist for years. In such an environment, any rate cut by the Fed risks further discouraging foreign inflows into Treasuries, potentially triggering a destabilizing cycle of surging yields and mounting fiscal strain.