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.
The Federal Reserve under Fed Chairman Jerome Powell has lowered interest rates by 25 basis points for the third time since September. The Fed funds rate following the December meeting now stands at a target of 3.50% to 3.75%.
There were three dissents to today's quarter point cut. Chicago Fed President Austan Goolsbee and Kansas City Fed President Jeff Schmid did not want the Fed to cut. Steven Miran also dissented, wanting a 50 basis point cut.
The Fed stated that its outlook for inflation and employment has not really changed. In support of the goals of balancing the risks, the Fed decided to engage in what many are judging to be its final cut for some time. With the polling over Fed governors indicating either zero or one cut in 2026, it is quite possibly the final cut of Jerome Powell tenure.
In the near term, the Fed recognizes that there are continued risks to inflation and risks to employment. While the economy is strong, and predicted to grow faster in 2026 than 2025, the Fed risks being boxed in. Powell believes that the logical position is to assume that that those risks to inflation are primarily related to tariffs and represent a one-time shock to the system. But, the US has not experienced tariffs like we are experiencing since World War II so there is clearly some guesswork, especially since government inflation numbers were not available for October or November while the government was closed. In any event, it seems prudent for the Fed not to continue cutting when it next meets on January 28, 2026, even if its ultimate objective is to get short-term rates closer to 2%.
The Fed also implemented QE lite which will involve some purchases of US debt securities on the short end of the curve. According to Powell, this is to ensure that the Fed has the reserves in order to alleviate possible pressures in money markets and enable that rates remain within the Fed remains within its target rate.
The real instability in rates however is at the longer end. Nothing that the Fed has done has had any impact on the long end of the curve. The 10-year Treasury began the year at 4.20%, and while it did trade below 4% on eight separate days this year, it is likely to close about where it began the year. Demand for long-dated US Treasuries is falling off a cliff as the US debt now approaches $39 trillion, and it may get still worse as Europeans chose to place there longer reserves closer to home as a result of the US's abandonment of Ukraine and NATO. So, in spite of the Federal Reserve's actions, we are seeing no relief for those looking for lower mortgage rates or home equity rates.
The Federal Reserve has lowered interest rates by 25 basis points at its October meeting. Its new rate target is 3.75% to 4.00%. The cut follows a 25 basis point cut in September.
The decision has two dissents, with one member arguing for no cut and one member arguing for a 50 basis point cut.
The Fed statement indicates that job gains have moderated and inflation has moved up. We seem to be entering a stagflationary environmment where anything that the Fed does risks exascerbating some pain for middle America. However, if the Fed continues to lower rates, wealthy Americans should fair well on market, and less well on their cash savings.
The Federal Reserve also announced that it is stopping quantitative easing and will no longer be selling its US Treasuries.
