The biggest Fed change investors will see coming: Morning Brief

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Federal Reserve policy enters 2025 wrestling with two key questions — how much further will the Fed cut rates and how will the central bank navigate a new fiscal environment given President Trump's tax and tariff plans?

In December, the central bank signaled that 2025 would see half the number of rate cuts it had previously expected back in late summer — two 25 basis point moves instead of four.

Read more: What the Fed rate cut means for bank accounts, CDs, loans, and credit cards

As for how Trump's policies might weigh on the outlook, Fed officials have already raised their inflation and growth forecasts for this year and next.

In a press conference, Fed Chair Jay Powell said regarding these forecasts that "some people did take a very preliminary step and start to incorporate highly conditional estimates of economic effects of policies into their forecast at this meeting and said so in the meeting."

How, if at all, these views have changed during the first days of the second Trump administration will be a key line of questioning for Powell during today's press conference.

But ahead of what markets expect to be an uneventful Fed meeting with no action expected on interest rates, some Wall Street economists are at least doing the preliminary work to think through what could prompt a more aggressive approach from the Powell Fed this year and what it would take for the Fed to turn around and raise interest rates.

After the December jobs report, economists at Bank of America said , "Our base case has the Fed on an extended hold ... But we think the risks for the next move are skewed toward a hike."

And these questions are clearly still swirling on Wall Street.

In a note to clients on Tuesday, Jonathan Millar and his team at Barclays explored what it would take for the Powell Fed to move from cuts to hikes.

Millar's team, to be clear, does not see the Fed raising rates this year. Rather, one rate cut in June followed by an extended hold that lasts into the middle of next year is their base case.

A shift from the Powell Fed, in Barclays' view, "would require evidence that convinces the committee that it is no longer on course to achieve its 2% inflation target over the medium term, which currently extends through 2027."

Looking at prior instances in which the Fed moved from rate cuts to rate hikes, Millar and team also found that these shifts require more than just inflation moving the wrong way, come alongside "an array of demand and supply indicators showing signs of overheating," and are signaled well in advance.