FOMC Meets in January Amid Continued Inflation and Softening Employment
The Federal Open Market Committee [FOMC] met for the first time in 2026 on January 27th and 28th. They had much to discuss since the shutdown-induced pause in economic data ended, leaving them with a free flow of information.
Based on the incoming data, the committee decided to temporarily pause interest rate cuts. This decision impacts businesses across the country and understanding the data behind it will help leaders solidify their path forward.
The FOMC Held Rates Steady in January
At the January meeting, the FOMC voted to hold the Fed Funds Rate at a target range of 3.50 – 3.75%, following 3 consecutive rate cuts. This range represents what the Fed calls a “neutral” stance, one that is intended to neither restrict nor accommodate economic expansion.
The interest rate decision was well-telegraphed, with nearly 100% of analysts correctly predicting the outcome of the meeting prior to its conclusion. However, the vote was not unanimous, as 2 committee members voted against the action. These members stated that they would have “preferred to lower the target range for the federal funds rate by 1/4 percentage point.”
Data Supporting the Decision: Inflation, Unemployment, GDP
Official economic information was limited in the 4th quarter due to the government shutdown. Fortunately, most of the delayed data was released prior to the January meeting, allowing the committee to make a data-based decision.
The data released between the December and January meetings showed a familiar picture for those who have been watching the U.S. economy over the past several years. It featured elevated inflation, a questionable labor market, and surprisingly solid economic growth. The FOMC mentioned all these data points in the statement announcing their decision, indicating that they were key considerations when setting interest rate policy.
Inflation Continues to Trend Above the FOMC’s Target
Data from the Bureau of Labor Statistics showed that the Consumer Price Index [CPI] rose by 0.3% in December and 2.7% from one year prior. Further, the Personal Consumption Expenditures [PCE] Price Index from the Bureau of Economic Analysis showed similar results in a combined report for October and November. In that report, prices rose by 0.2% in both October and November, bringing the annual inflation rates to 2.7% and 2.8%, respectively.
Both CPI and PCE inflation measures show that price escalation has cooled from the highs in 2022 but remains above the Fed’s 2% target. Fed Chairman Jerome Powell stated that “elevated readings largely reflect inflation in the goods sector, which has been boosted by the effects of tariffs.” Conversely, prices for services continue to decline.
Employment Numbers Beat Expectations, Labor Market Remains Subdued
The Bureau of Labor Statistics released a report in early January showing that the U.S. added 50,000 jobs in December, leading to an unemployment rate of 4.4%. This rate was 0.1 percentage points below the Fed’s projection of 4.5% unemployment for 2025, but remains well above the 2024 level.
While the final employment figure for the year surpassed expectations, perceptions of the labor market remain somewhat subdued. In fact, the New York Fed’s research showed that perceptions of job availability fell to a new low in December.
In the press conference following the interest rate announcement, Chair Powell elaborated on developments in the labor market. He stated, “indicators suggest that conditions may be stabilizing after a period of gradual softening.” Then, he continued to explain, “slowing in the pace of job growth over the past year reflects a decline in the growth of the labor force, due to lower immigration and labor force participation, though labor demand has clearly softened as well.”
GDP Remained Strong in Q3
The most recent update to Gross Domestic Product [GDP] showed an annualized rise of 4.4% in the 3rd quarter of 2025, which followed a 3.8% increase in the 2nd quarter. Chair Powell described the U.S. economy as heading into the new year on “firm footing.” He went on to say that consumer spending remains resilient and that business fixed investment continues to expand. On the other hand, he mentioned that “activity in the housing sector has remained weak.”
Overall, the economic data released between the December and January meetings showed little change from earlier in 2025. Chair Powell stated that the current level of the Fed Funds Rate “should help stabilize the labor market while allowing inflation to resume its downward trend toward 2 percent, once the effects of tariff increases have passed through.”
Expectations for the Future of Interest Rates
With the Fed Funds Rate currently in a neutral position, the Fed can take a wait-and-see approach to monetary policy. This allows committee members to review economic data as it is released, then determine an appropriate course of action based on progress toward the dual mandate of maximum employment and stable prices.
While there is not a guarantee of future action, the Fed does release projections for the future of interest rates. The most recent forecast, released in December, shows 1 rate cut in 2026. Participants do not release their forecasts for the timing of rate cuts, so there is no definitive way of knowing when they expect the cut to occur.
On the other hand, analysts do make time-based predictions, and the current projections show stable rates at both the March and April meetings. Then, forecasts show a rate cut in June. Keep in mind that projections can change rapidly, based on new data and the trajectory of the economy.
In the short term, interest rates are expected to remain stable, which provides an opportunity for business leaders to step back and evaluate their cash holdings and loans. During this pause, prudent financial managers can continue to monitor economic data and adjust their holdings to align with forecasts of future policy actions.
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