WASHINGTON (TNND) — The Federal Reserve will hold its first meeting of 2026 this week where officials are broadly expected to hold steady on another interest rate cut to see how the economy evolves after 75 basis points in reductions to close last year to aid a stalling labor market.
The U.S. economy is still facing headwinds in the form of policy uncertainties, prolonged inflation stretching budgets for lower- and middle-class households and geopolitical turmoil, but comes into 2026 on relatively solid ground with continued spending upholding growth and hopes of renewed momentum in the first half of the year with last year’s tax cuts taking effect and eased monetary policy spurring more activity.
Steady growth and little indication of disinflation put Fed officials in wait-and-see mode for at least the first meeting and install a higher bar to justify further easing.
Futures markets have priced a pause for January as a certainty with less than a 3% chance of a quarter-point reduction, according to the CME FedWatch tool. After December’s meeting brought a third consecutive quarter-point cut, most officials have offered little indication they are seeing a need to further ease rates.
Officials are coming into the January meeting with the return of government-produced economic data, which was delayed for nearly two months by the shutdown. Subsequent reports since the government reopened have showed an economy adjusting to a new environment with inflation lingering near 3%, contained job losses and solid growth despite all the uncertainties. The return of data does not come without caveats, as economists and Fed officials have said releases will be subject to large revisions because of gaps in collection and other distortions from the shutdown.
Data from the final quarter of 2025 has given little indication of another cut this month, meaning attention will instead be focused on the Federal Open Markets Committee statement and chair Jerome Powell’s press conference. Fed watchers will be listening for indications on how Fed officials are viewing the trajectory of inflation, a wobbly labor market and geopolitical unknowns that have rattled markets like Greenland and Venezuela.
“With such low odds for the first half of this year, people are going to really be listening to the language more than the ultimate decision,” said Russell Rhoads, a clinical associate professor of financial management at Indiana University’s Kelley School of Business.
The meeting is also the first since Powell revealed the Justice Department is investigating him over testimony before Congress on the Fed’s building renovations that added to the concerns about the central bank’s independence and the Supreme Court heard arguments about whether President Donald Trump has the authority to fire governor Lisa Cook.
Trump has pushed repeatedly for the Fed to slash rates to boost the economy and ridiculed Powell for recent rate decisions not going far enough. Powell said in his video statement the investigation into him and attempt to fire Cook were “intimidation” to pressure the central bank to lower rates.
Policymakers have already signaled additional rate cuts will be harder to come by with inflation still running above the target of 2% and many believing the Fed’s benchmark rate is at or nearing “neutral,” where they do not spur or constrain economic activity. Dissent had already become a more common theme to close 2025 with some hawkish members questioning the need to cut rates. The dot plot, a chart indicating where officials expect rates to move in the future, showed six policymakers would have preferred to hold last month.
The debate within the Fed is based on which end of their dual mandate of maximum employment and steady prices faces a greater risk.
Progress on getting inflation back to target has stalled near 3%, with both the November and December readings of the consumer price index showing the annual inflation rate at 2.7%. The personal consumption expenditures index, the Fed’s preferred measure of inflation from November released last week had prices at 2.8% higher compared to a year ago.
Meanwhile, job creation has sputtered since the first quarter, with businesses adding just 28,000 jobs a month since March. But the unemployment rate has been contained at 4.4%, showing that companies are hanging onto workers instead of announcing layoffs.
Despite struggles tamping down inflation and concerns about the strength of the job market, the economy has continued to show resilience to the headwinds its facing, growing at the fastest rate in two years during the third quarter at a 4.4% pace, which comes after a 3.8% jump during the second quarter from April to June.
Economists are expecting the fourth quarter GDP to remain strong on the back of robust consumer spending for the holidays, and the Federal Reserve Bank of Atlanta’s GDPNow tool is forecasting a 5.4% increase. Continued growth with elevated inflation would give wary officials little inclination to lower rates that risk prices spiking again.
“I do wonder if the Fed may become a bit less concerned about inflationary pressures if they see solid growth coming along as well,” Rhoads said. “The last thing in the world that you want is stagflation.”