Fed FOMC Meeting January 2026- My Take

Federal Reserve Meeting Analysis – January 2025

Key Concepts:

• Fed Funds Rate: The target rate that the Federal Reserve sets for commercial banks to lend reserves to each other overnight. Currently in the 3.5-3.75% range.
• PCE (Personal Consumption Expenditures) Inflation: The Fed’s preferred measure of inflation, tracking price changes for goods and services purchased by consumers.
• Neutral Rate: A theoretical interest rate that neither stimulates nor restricts economic growth. Its current level is debated, but estimates suggest the Fed is near it.
• Quantitative Tightening (QT): The process of the Federal Reserve reducing its balance sheet by allowing previously purchased securities to mature without reinvestment.
• Dot Plots: Visual representations of individual Federal Open Market Committee (FOMC) members’ projections for future interest rates.
• Tariff Impact: The effect of imposed tariffs on import costs and ultimately, consumer prices.
• FOMC (Federal Open Market Committee): The body within the Federal Reserve System responsible for setting monetary policy.
• Non-Farm Payrolls: A measure of the number of jobs added to the U.S. economy each month, excluding farm employment.

I. Meeting Decision & Rationale

The Federal Reserve decided to hold interest rates steady at the 3.5-3.75% range during this meeting. This decision was not unanimous, with two committee members – Steven Moran and Waller – dissenting and advocating for a rate increase. The primary rationale for the pause is that the Fed has already implemented 75 basis points of rate cuts, bringing policy to a “reasonable place” to observe incoming economic data. Chairman Powell indicated that the “job isn’t done” regarding inflation control, despite claims from former President Trump that inflation has been “killed.”

A key point emphasized was that the full impact of previously imposed tariffs has not yet been realized. While companies initially absorbed tariff costs, they are now signaling intent to pass these costs onto consumers, potentially leading to a delayed inflationary effect. The Fed is monitoring tariff impacts on a case-by-case basis, noting that the actual tariffs implemented were smaller in scope than initially announced in April 2025, and lacked significant counter-tariffs.

II. Economic Condition Overview

The Fed’s economic assessment was generally upbeat. Growth is on a “strong footing,” supported by a 6% fiscal deficit (comparable to wartime levels). Consumer spending remains resilient, and business investment is expanding, particularly in AI infrastructure. However, housing remains a weak spot. The recent data is somewhat distorted by a temporary federal government shutdown, which likely suppressed growth in the previous quarter but is expected to provide a boost in the current quarter.

The labor market is a point of concern. While initially causing concern for former President Trump, Powell suggested it may be stabilizing after a period of softening, but remains uncertain. Data collection challenges, including declining response rates to labor surveys, are impacting the reliability of these figures. Non-farm payrolls have been weak, with recent prints of 56,000 and 50,000 new jobs added – roughly the number needed to absorb new entrants into the workforce. However, unemployment hasn’t risen dramatically, potentially due to slowing labor supply growth, influenced by lower immigration and changes in labor force participation rates.

III. Inflation Analysis

Despite progress, inflation remains “sticky” and above the Fed’s 2% target. Total PCE inflation is around 2.9%, while core PCE inflation (excluding volatile elements) is around 3%. A significant driver of current inflation is goods inflation, a reversal from the previous trend where services were the primary inflationary pressure. This shift is attributed to the impact of tariffs.

The Fed is closely monitoring whether tariff-driven inflation will be a temporary, one-off shock or a sustained increase. If inflation expectations become anchored at higher levels, the inflationary pressure could become persistent. Currently, expectations appear consistent with the 2% target.

IV. Future Policy Direction

Powell emphasized that there is “no preset path” for future rate adjustments, and no eagerness to raise rates further. The current stance is a “pause,” with a “reasonably restrictive” monetary policy. The Fed will remain “data dependent,” assessing both inflation and labor market conditions.

To justify further rate cuts, the Fed needs evidence of cooling inflation or a significant weakening of the labor market. The committee’s base case currently does not anticipate a rate hike. The futures market anticipates the first rate cut in June 2026.

V. Political Context & Fed Independence

The meeting was described as “politically sensitive.” Powell addressed recent subpoenas issued to the Federal Reserve related to renovations of Fed buildings, referring to his January 11th statement for details and characterizing the subpoenas as a pretext for political pressure. He asserted that the actions were a consequence of the Fed setting interest rates based on economic considerations rather than presidential preferences.

Powell strongly defended the independence of the Federal Reserve, stating it is crucial to avoid monetary policy being used for election cycle politics. He warned that a loss of independence could lead to short-term political gains (e.g., lower interest rates, economic boosts) but ultimately result in runaway inflation and economic instability, citing the example of Turkey’s central bank. Maintaining credibility is paramount, as a loss of trust would severely hamper the Fed’s ability to manage the economy.

VI. Market Observations & Data Points

• Non-Farm Payrolls: Recent prints (56k, 50k) are weak, but unemployment hasn’t risen significantly due to slowing labor supply.
• Core PCE Inflation: Currently at 3%, above the 2% target.
• Fiscal Deficit: 6% of GDP, contributing to economic growth.
• Productivity Growth: Strong in the US (2-5% in 2025), potentially driven by AI, but stagnant in the UK.
• US Equity Market Rotation: A shift from large-cap growth (Mag 7) to small-cap value is observed.
• International Equity Performance: Emerging markets, particularly Peru, have outperformed the US recently.
• Treasury Market: The speaker personally avoids US Treasuries, citing concerns about the US economic outlook and preferring UK-denominated assets.

VII. Conclusion

The Federal Reserve is maintaining a cautious approach, pausing rate hikes while closely monitoring economic data, particularly inflation and the labor market. The meeting highlighted the delicate balance between controlling inflation and avoiding economic recession. The defense of Fed independence was a central theme, emphasizing the importance of data-driven decision-making free from political interference. The speaker believes the US has achieved a “soft landing,” but cautions against declaring victory prematurely, emphasizing the need to monitor the impact of tariffs and labor market dynamics. The overall message is one of watchful waiting, with the next move contingent on incoming data and a careful assessment of evolving economic conditions.