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Economics Research6 Feb 2026
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US/Japan: Fed independence; Japan snap election in focus. The Fed’s independence remains a question. US President Donald Trump expects his Fed Chair nominee, Kevin Warsh, to resume rate cuts. However, it is still unclear whether the US Senate will begin the confirmation hearing for Warsh to succeed Powell in mid-May, as it faces opposition from Senators Thom Tillis (Republican) and Elizabeth Warren (Democrat) regarding the legal cases against Powell and Governor Lisa Cook.

Meanwhile, the US ISM Manufacturing PMI was significantly stronger at 52.6 in January, well above the consensus for a rise to 48.5 (from 47.9 in December). New orders surged to a three-year high of 57.1, employment climbed to a one-year high of 48.1 (though still below the 50 break-even level), and prices paid increased to a four-month high of 59. In addition, the ISM services PMI, which carries greater weight for the US economy, came in at 53.8, defying market expectations of a moderation to 53.5 (from 53.8 in December).

Market attention now turns to next week’s delayed labour report (11 Feb) and CPI release (13 Feb), both postponed due to the partial government shutdown. Market consensus expects NFP at 71K (up from 50K in the preceding month) and a flat unemployment rate at 4.4%, while headline CPI to rise by 2.5% in January from 2.7% in December.

At current levels, the market is indicating two rate cuts by year-end. Our version of the Taylor Rule model suggests that policy settings are already neutral (if not a tad dovish given current data). We see risks that the Fed may cut rates later than our current 1Q26 forecast.

Turning to Japan, expectations are high that the ruling Liberal Democratic Party (LDP) will reclaim a single-party mandate in snap elections on 8 Feb. At face value, this implies higher odds of expansionary fiscal policies (possibly a record national budget in April) and arguably more pressure on the Bank of Japan to keep rates steady.

Figure 1: Taylor rule and Fed Funds rate

Source: Bloomberg, DBS
Note: Assumptions made on regime shift and other variables




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