The Fed has begun 2026 by leaving the Fed Funds rate unchanged at a 3.50% to 3.75% target.
The decision was not unanimous. Governors Stephen Miran and Christopher Waller both dissented from the majority's opinion, indicating that they would have preferred a quarter-point rate cut.
The Fed's decision to hold pat marks a change from the last three meetings, each of which involved a quarter-point cut.
The Fed is able to pause here because the majority of the committee feels that data shows that the downside risks to employment have diminished. It is unclear whether these risks have diminished due to curtailment of immigration and fewer job cuts due to AI implementation than had been projected, or if those are just coincidental.
The US has experienced 3.0% core PCE inflation for the three months ending in December 2025. This measure stood at exactly the same level at December 2024. Inflation would be closer to the Fed's 2% target but for the tariffs implemented in 2025. The Fed's anticipation is that the tariffs are having a one-time effect on inflation that will fully work through the system within eight to nine months after first implemented (by the middle of 2026). Therefore, the Fed's position is that the upside risks to inflation have also largely diminished.
The Fed's position is basically neutral and the Fed is likely - although not certain - to remain neutral through Powell's last two meetings as Fed Chairman. It is also likely that we will see one or two more quarter-point cuts in 2026.
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