Fed Meets This Week With Rate Pause All But Certain
FOMC expected to hold rates at 3.5%-3.75% at January 27-28 meeting. Markets look ahead to June for next potential cut.
The Federal Reserve meets Tuesday and Wednesday with rate markets pricing in a near-certainty of no change.
The federal funds rate currently sits in a range of 3.5% to 3.75% after three cuts totaling 75 basis points in 2025. This week's meeting marks the first of 2026, and traders see essentially zero chance of a move in either direction.
What to Expect
The Fed's January 27-28 meeting won't deliver a rate cut. CME FedWatch data shows markets assigning greater than 99% probability to a hold.
The real focus is on forward guidance. Chair Jerome Powell's press conference Wednesday afternoon will set the tone for how traders position through the first half of 2026. Right now, futures imply two quarter-point cuts this year—but not until June at the earliest.
That's a slower pace than many expected entering the year. The Fed's own December "dot plot" projected just one additional 25 basis point cut, which would bring rates to around 3.25% to 3.50% by year end. Wall Street has largely converged on that view.
The Inflation Problem
Recent inflation readings explain the caution.
December CPI came in hotter than expected, reinforcing the narrative that the last mile of disinflation is proving stubborn. Core services inflation—driven by shelter, healthcare, and insurance costs—remains elevated. The Fed can't declare victory while these categories push above 4%.
Friday's University of Michigan sentiment survey offered some relief. Year-ahead inflation expectations dropped to 4.0%, the lowest reading since January 2025. If consumers believe price pressures are easing, actual inflation tends to follow. But one data point doesn't make a trend.
The Fed's preferred measure—core PCE—arrives Friday. That report will inform markets more than Wednesday's meeting.
Political Backdrop
The meeting comes amid unusual political pressure on the central bank.
President Trump has repeatedly called for lower rates, arguing that monetary policy is too restrictive given cooling labor markets. The December jobs report showed just 50,000 net new positions—the weakest hiring month since 2020—adding ammunition to the rate-cut case.
But Powell has shown no inclination to bow to political pressure. The Fed's independence remains a point of contention, particularly after reports of a DOJ investigation that some viewed as an attempt to pressure the chair.
The uncertainty around Fed leadership has added another layer of complexity. Kevin Warsh has emerged as a potential successor to Powell when his term expires in 2028, though that timeline remains distant.
Market Positioning
Treasury yields fell Monday as investors positioned for the week ahead.
The 10-year yield dropped to 4.58%, down from recent highs above 4.70%. The two-year yield—more sensitive to near-term Fed expectations—held near 4.28%. The yield curve remains slightly inverted, though less dramatically than during the 2024 tightening cycle.
For equity markets, a rate pause is largely priced in. The bigger question is how earnings season unfolds. Four of the Magnificent Seven—Microsoft, Meta, Tesla, and Apple—report this week, and their guidance will likely move markets more than anything Powell says.
The Longer View
Moody's economist Mark Zandi has argued the Fed should deliver three cuts in the first half of 2026, citing economic softness that he believes warrants more accommodation. The market disagrees—at least for now.
The disconnect matters. If the economy weakens faster than expected, the Fed could pivot to a more aggressive cutting cycle. But if inflation proves stickier, the pause could extend well into summer.
For traders, Wednesday's statement language will be critical. Any shift in the Fed's characterization of inflation risks or labor market conditions could reset expectations. Until then, the base case is simple: hold steady, wait for more data, and hope the economy finds its footing without requiring dramatic intervention.