Fed Set to Pause Rate Cuts

The Fed left the federal funds rate unchanged at the 3.5%–3.75% target range in its January 2026 meeting, in line with expectations, after three consecutive rate cuts last year that pushed borrowing costs to their lowest level since 2022. Governors Stephen Miran and Christopher Waller however, voted against the hold, with both advocating another 25bps cut. Policymakers noted that economic activity has been expanding at a solid pace, job gains have remained low, and the unemployment rate has shown some signs of stabilization, while inflation remains somewhat elevated. The central bank also reinforced that it will carefully assess incoming data, the evolving outlook, and the balance of risks when considering the next adjustments to the fed funds rate. During the regular press conference, Chair Powell said the US economy is coming into 2026 on a firm footing and that interest rates right now are appropriate to promote progress toward both of the Fed’s goals.

The Federal Reserve is widely expected to leave the federal funds rate unchanged at the 3.5%–3.75% target range in its January 2026 meeting, pausing its easing cycle after three consecutive rate cuts last year that pushed borrowing costs to their lowest level since 2022. Investors will be watching closely for guidance on the timing of the next rate cut, although policymakers may signal an extended pause. Job growth has slowed sharply, the unemployment rate has stabilized, and inflation remains stubbornly above the Fed’s 2% target. In its December projections, the Fed signaled just one 25-basis-point rate cut in 2026. Markets currently expect that cut to come in June, while pricing in a smaller probability of an additional move in December. Meanwhile, Chair Powell’s first press conference since the Fed received grand jury subpoenas is likely to feature questions about political pressure and central bank independence.

Minutes from the Fed's December meeting noted that most of the FOMC judged that rate cuts are likely to be appropriate next year if inflation eases over time. Still, policymakers were divided in their assessment of risks between higher inflation and unemployment, with a part of the FOMC displaying greater concern that inflation becoming entrenched may require higher borrowing costs, while others preferred a greater magnitude of rate cuts to curb signs of a softening labor market. The December meeting saw a reduction in the federal funds rate by 25bps to a range of 3.5%–3.75%, matching the consensus by markets, for a third cut in the year. The decision featured two dissents, with two members opting for a hold while new FOMC Governor Miran opted for a 50bps cut. Additionally, the SEP featured in the meeting indicated that policymakers were more optimistic about growth next year, reflecting a smaller-than-expected initial impact from tariffs.