The Federal Reserve kept its benchmark federal‑funds rate unchanged at 3.5% to 3.75% in its first policy meeting of 2026, marking a pause after three consecutive cuts at the end of last year. The decision, which passed on a 10–2 vote, reflected policymakers’ desire to proceed cautiously as inflation remains above the Fed’s 2% target and labour‑market cooling has slowed. Both Stephen Miran and Christopher Waller dissented in favour of a quarter‑point cut, continuing their push for more aggressive easing. Officials made only modest changes to the post‑meeting statement and offered no strong indication of when cuts might resume, stressing that decisions will be made “meeting by meeting.”

Chair Jerome Powell noted that the Fed is balancing persistent inflation with signs that the labour market has steadied, even if job gains remain subdued. He described recent data as mixed, with tariff‑driven inflation playing a significant role in recent price increases—an element he called “good news” since it is less indicative of overheating demand. The Committee remains divided over how restrictive current rates are, with some members worrying that policy may no longer be tight enough to push inflation lower, while others fear that maintaining existing levels too long could weaken the job market unnecessarily. Powell reiterated that the Fed is not articulating a specific test for future cuts and remains well‑positioned to evaluate policy changes as new data emerges.

Complicating this policy backdrop is an unusually charged political environment. The meeting came amid a Justice Department investigation into Powell, which he described as a pretext for political pressure from the White House to lower rates. Meanwhile, the Supreme Court is weighing President Trump’s attempt to remove Fed Governor Lisa Cook, and Trump is expected to announce a successor for Powell—whose term ends in May—within days. These pressures have contributed to a more fractious Federal Open Market Committee, with dissent becoming more common and analysts warning that the elevated political stakes risk reshaping how the Fed typically builds consensus.

Looking ahead, policymakers remain divided on the trajectory of interest rates in 2026. In December, a majority of Fed officials projected at least one rate cut this year, but neither of the key conditions that would justify easing—clear progress toward 2% inflation or renewed labour‑market deterioration—has emerged since then. Analysts widely expect the Fed to remain on hold unless economic data breaks decisively in one direction. With inflation still sticky, unemployment holding steady, and political scrutiny intensifying, the January meeting underscores a Fed in cautious wait‑and‑see mode as it navigates economic crosscurrents and an approaching leadership transition.

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