What to expect from the January Fed meeting
Central bankers are likely to hold interest rates steady, but Wall Street is focused on life after Powell.
Key takeaways
- The Fed is widely expected to hold interest rates steady in its first meeting of 2026.
- Inflation is still above the Fed’s target, while the labor market remains weak.
- Analysts say the outlook for the central bank could change in the second half of the year after the appointment of a new chair.
The first Federal Reserve meeting of the year isn’t expected to make waves, at least when it comes to policy. But Wall Street will be watching closely for clues about how the central bank will navigate 2026 after a bumpy 2025.
Markets see almost no chance of an interest rate cut this time. The Fed’s policy-setting committee is still contending with a mixed picture on both inflation and jobs—price pressures remain elevated, while the labor market has cooled. That dynamic fueled unusual divisions among central bankers in the final months of 2025 and is expected to persist through the first months of this year.
After three consecutive cuts at the end of 2025, which brought the benchmark interest rate down to a range of 3.50%-3.75%, central bankers are expected to remain on hold as they await further data.
Eric Freedman, chief investment officer at Northern Trust Wealth Management, says he’s thinking about the Fed in 2026 in two stages: before Powell’s term ends in May, and after. “What does life look like before May, and then what’s the reception after June?” The June FOMC meeting will be the first under the bank’s new leadership.
Fed’s future in flux
That’s because simmering (perhaps boiling) in the background are larger questions about the future of the central bank and its independence from the executive branch.
For one, Wall Street is anxiously awaiting President Donald Trump’s pick for the Fed’s next chair, which could be announced any day. Markets widely expect the president’s candidate to support his push for lower interest rates, though analysts say the committee-based structure of the Fed will make it difficult for one individual—even the chair—to have an outsized influence on policy.
“Ultimately, we think that that there’s probably more pomp and circumstance relative to what will actually play out” says Freedman of Northern Trust. He adds that the Fed has a much smaller influence on longer-dated bonds, which have a greater impact on consumer finances than shorter-dated ones.
Also at play are even larger existential questions for the Fed. Last week, the Supreme Court heard arguments over whether Trump can legally remove Fed Governor Lisa Cook from her position at the central bank—a move some analysts have described as an overreach of presidential power that has the potential to erode the Fed’s credibility.
Those arguments came just days after current Fed Chair Jerome Powell announced that the US Department of Justice had issued subpoenas against the Fed and threatened a criminal indictment in connection with the ongoing renovation of the central bank’s office buildings.
Fed to remain focused on labor market
The Fed’s preferred gauge of inflation came in at 2.8% for December (above its 2% target), thanks in part to upward pressure stemming from tariffs. Meanwhile, the US economy added 50,000 jobs for the month, which was a relatively weak reading, though a far cry from the dramatic monthly declines seen in the second half of 2025.
Sticky inflation calls for higher interest rates, while a cooling jobs markets calls for lower rates to stimulate the economy. The central bank can only address one of those issues at a time by pulling the lever on interest rates—an ongoing dilemma. “This tug of war between inflation and the labor market has been very consistent,” says Freedman of Northern Trust.
Powell emphasized last year that the Fed would lean toward supporting the labor market as it cooled. Freedman expects that bias to persist, but he says the central bank will also focus on remaining nimble while the economic picture looks muddy. “The Fed wants to keep their options very, very open,” he explains.
While risks to the economy remain, recent data shows that they have eased. “Downside risks to the labor market aren’t as pressing as they appeared a few months ago, while the upside risks to inflation also appear to have moderated,” Oxford Economics chief US Economist Michael Pearce wrote in a recent note. “The balance between the two risks remains largely unchanged.”
When will the Fed cut rates?
Markets expect the Fed to keep interest rates on hold until the second half of the year, after the appointment of a new chair. Bond futures traders are pricing in 45% odds of a cut in June, which would bring the target federal funds rate down to a range of 3.25%-3.50%. They are pricing in one additional cut closer to the end of the year, for a total of two cuts in 2026.
Economists from Wells Fargo see cuts coming sooner, in March and June, given that two more months of economic data will be released ahead of the March meeting. That said, they say that firmer growth and a stabilizing labor market could shift their forecast and leave a narrow window for the Fed to ease policy this year. “The risks to our call look increasingly skewed toward later and possibly less easing,” they wrote in a Friday research note.
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