The Federal Reserve is set to hold its regularly scheduled policy meeting this week, and markets widely expect interest rates to remain unchanged. That would keep the federal funds target range at 4.25% to 4.5%. While the rate decision itself is unlikely to surprise, investors are watching closely for any signals about a potential pivot toward rate cuts later this year.

Recent economic data suggests that inflation in the U.S. is gradually easing and moving closer to the Fed’s 2% target. However, signs of weakness are emerging in the job market—unemployment has risen from a low of 3.4% last year to the current 4.2%, and layoffs have picked up noticeably. This slowdown in momentum has yet to persuade Fed officials to shift course. So far, they’ve maintained a wait-and-see stance, citing generally solid economic conditions and no urgent need to cut rates.

Politics is another growing factor on the radar. Former President Donald Trump recently called for the Fed to slash rates by two full percentage points to support economic growth and ease pressure on consumers. The Fed, however, has reiterated that its decisions will be driven strictly by economic data, not political pressure. With uncertainty surrounding future trade policy—such as the potential reintroduction of tariffs—inflation could be pushed higher again, narrowing the Fed’s room to maneuver on monetary policy.

Many in the market still believe a rate-cut cycle could begin in the second half of the year, especially if the labor market continues to soften and inflation remains under control. According to the CME FedWatch tool, there’s still a notable chance of a rate cut beginning in September. But the precise timing will depend on how future data unfolds.

The Fed’s recent communication suggests its current focus is on three key areas: the health of the labor market, the trajectory of inflation, and global economic and financial risks. For now, the Fed is opting for caution and flexibility. In this environment, investors should stay attuned to incoming data, heed comments from Fed officials, and closely analyze post-meeting statements to prepare for potential policy shifts.

In summary, while no immediate rate move is expected at this meeting, the real story lies in the guidance around the Fed’s next steps. Markets are positioning for a possible turning point, and upcoming data and Fed commentary will be critical in shaping expectations.