The Federal Reserve is expected to keep interest rates unchanged at its January 2026 meeting, though its hawkish posture may be overstated. Analysts suggest the central bank’s priority remains stabilizing the labor market, with three rate cuts still anticipated next year.
In December, the Fed cut rates as expected, lowering the federal funds target range to 3.5%-3.75%. The decision sparked dissent: Regional Fed presidents Austan Goolsbee and Jeffrey Schmid voted to hold rates steady, while Governor Stephen Miran favored a deeper 50-basis-point cut.
While the meeting’s overall tone leaned hawkish, it was less aggressive than markets had feared. Chair Jay Powell noted rates are "within a broad range of estimates for neutral" and emphasized the FOMC’s readiness to monitor economic developments.
Monetary Policy Radar analysts interpret Powell’s remarks as confirmation of their view that the Fed will pause at its late-January meeting. However, they caution against overreading December’s hawkish signals, pointing to the Fed’s established focus on labor market stability over transitory tariff-driven price pressures.
The team sees the December cut—following weeks of deliberation—as evidence this policy framework remains intact. With labor market softness likely persisting into 2026, they expect another 25-basis-point cut in March, reinforced by recent weaker-than-expected CPI data despite quality concerns.
Their projections include quarterly rate reductions through June (3%-3.25% target), followed by a third cut in late 2026. While risks remain given expectations of continued economic strength, they anticipate a more dovish tilt under a new Fed chair taking office in May—making their forecast more aggressive than futures pricing.
Key Meeting Outlooks:
January 2026: - Rate hold (70% probability) as hawks resist a fourth consecutive cut - Voting member rotation unlikely to significantly alter policy trajectory
March 2026: - 55% chance of cut to 3.25%-3.5% amid labor market focus - November’s 2.7% CPI print supports easing bias
June 2026: - Potential for two H1 cuts bringing rates to neutral range - First meeting under new leadership, likely more data-dovish - Risk of Trump-appointed chair accelerating easing
December 2026: - Additional cut expected (2.75%-3.25% target range) - More dovish than median FOMC projections - Tariff-related inflation risks may prompt caution
2027 Outlook: - Gradual normalization toward neutral (~3.25%) - Potential 1-2 hikes if 2026 proves dovish
Long-Term View: - Neutral rate estimate maintained at ~3.25% - Scenarios range from 1.5%-5% based on growth/inflation dynamics
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