- Markets and economists expect the Fed to hold rates at 3.5075% at the Jan. 2728, 2026 meeting, with little chance of an immediate cut.
- Inflation is easing only slowly, with CPI at 2.7% YoY and core CPI at 2.6%, keeping policy restrictive.
- Firm growth and a resilient labor market push expected rate cuts to mid- or late-2026, with some forecasters seeing none this year.
- Trade tensions and political pressure on Chair Powell add uncertainty and elevate concerns about Fed credibility and independence.
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The upcoming Federal Reserve meeting on January 27-28 is expected to result in no change to the policy rate, which has held steady at a target range of 3.50–3.75%. This consensus is supported by major polling among economists and reflected in forward market pricing, which shows a very high probability of a no-move outcome.
Inflation remains a central constraint. Headline CPI for December 2025 came in at 2.7% YoY, holding steady from November, while core CPI was 2.6%, slightly below expectations. Though these readings signal cooling inflation, they remain above the Fed’s target and point to stickiness in sectors such as shelter and food.
Economic conditions are adding pressure against near-term cuts. Recent growth projections have been revised upward modestly, and the labor market—while cooling slightly—is still firm enough to dissuade the Fed from cutting unless clear evidence of slack emerges.
Expectations for rate cuts are primarily shifted toward mid- to late-2026, especially after Chair Powell’s term ends in May. Several major institutions, including JPMorgan, now forecast zero cuts through 2026, followed by a potential hike in 2027. Others still see one or two cuts later in the year under mild economic slowdown scenarios.
Geopolitical risk and political pressure on the Fed are rising. Trade disputes—such as tariff threats—and public criticism of Powell’s leadership are adding uncertainty. While these factors have not yet altered policy decisions, they may affect market psychology and expectations about policy credibility and central bank independence.
Strategic Implications: Fixed income investors may benefit from locking in rates given expectations of high yields persisting. Equities may face compressed gains unless inflation shows sharper declines. Corporates with exposure to interest rate or input price risk should emphasize hedging. Policymakers risk credibility loss if inflation fails to move toward target without clear messaging.
Open Questions:
- Will upcoming labor market data (wages, employment) show weakening sufficient to shift the Fed’s outlook?
- Can inflation, particularly in housing and food, decelerate more rapidly without inducing broader economic weakness?
- How much will trade policy and geopolitical tensions factor into Fed risk assessments or force more hawkish communications?
- What tone will Chair Powell set regarding his future role and the potential influence of political pressures?
Supporting Notes
- All 100 economists surveyed in a recent Reuters poll expect the Fed to leave rates unchanged at the January meeting; 58% also expect no rate cuts through Q1 of 2026.
- Core CPI fell slightly to 2.6% YoY in December 2025 (same as November), marking the lowest reading since March 2021; headline CPI also at 2.7% YoY and +0.3% MoM.
- JPMorgan—among others—now predicts zero rate cuts in 2026 and foresees the next rate move being a hike in 2027.
- Polls show economic growth expectations for 2026 revised up (≈2.3%) despite inflation remaining above the Fed’s 2% target, constraining near-term easing.
- Geopolitical developments, such as tariff threats and public criticism of Powell, are intensifying, potentially adding to policy risk and investor wariness.