Fed likely to keep rates steady as economy shows mixed signals

• Key Insight: The FOMC is expected to keep short-term interest rates unchanged at its January meeting, reflecting a cautious approach amid mixed economic signals.
• Expert Quote: "The timing of further rate cuts in 2026 will depend on whether recent progress in lowering inflation continues, as well as the ongoing health of the employment situation amid weakening jobs growth." — Charlie Wise, senior vice president of research and consulting at TransUnion.
• Forward Look: Investors and markets will be closely watching Fed Chair Jerome Powell's post-meeting remarks for clues on the central bank's path for rates later in 2026.

The Federal Reserve's rate-setting arm is expected to keep monetary policy unchanged at its first meeting of the year, despite sustained pressure from the Trump administration for the central bank to cut its benchmark short-term interest rate.

The Federal Open Market Committee cut rates by a total of 75 basis points across its September, October and December meetings, bringing the target range to between 3.50% and 3.75%. According to the CME Fedwatch tool, an overwhelming 97.2% of investors expect rates to hold steady in January, while 2.8% believe that rates will be cut by 25 basis points. The Fed benchmark rate influences a wide range of consumer interest rates, including home mortgage rates.

Following the December cut, Fed Chair Jerome Powell signaled a wait-and-see approach, suggesting policymakers would pause until there is greater clarity about the economic outlook.

Recent economic data hasn't been especially instructive. Inflation was clocked at 2.7% in December, remaining above the Fed's 2% target but broadly in line with prior months. At the same time, the labor market showed signs of cooling, with employers adding just 50,000 jobs last month.

Several members of the FOMC, including Federal Reserve Vice Chair for Supervision Michelle Bowman and Minneapolis Federal Reserve President Neel Kashkari, voiced concern about the labor market, signaling potential divisions among policymakers ahead of the January meeting.

"The labor market can appear to be stable right up until it doesn't," Bowman said in a mid-January speech. "Absent a clear and sustained improvement in labor market conditions, we should remain ready to adjust policy to bring it closer to neutral."

Derek Tang, CEO of Monetary Policy Analytics, said he expects Powell to reiterate that the Fed is well positioned to see how the economy evolves, while avoiding guidance on a possible March move.

"That would mean the March door is more open than the market is pricing. It makes sense since the crosscurrents remain confusing — between a weak labor market, falling inflation, but robust growth," said Tang. "Layer [that] on top of the political events and Powell has a big job on his hands."

Wise echoed expectations that the Fed will hold rates steady as it assesses the impact of last year's cuts. As a result, he said, consumers should not expect near-term improvements in credit affordability until the Fed determines additional easing is warranted.

"The timing of further rate cuts in 2026 will depend on whether recent progress in lowering inflation continues, as well as the ongoing health of the employment situation amid weakening jobs growth," said Wise. "Most households continue to manage their current debt obligations well, aided by continued modest but still positive wage gains for consumers overall."

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Jeff DerHurahian, chief economist at mortgage lender LoanDepot, said markets are assigning an "almost zero probability" to a rate cut at this meeting, but noted that investors will be closely focused on Powell's post-meeting press conference.

"Markets will closely watch the tone and the question-and-answer session that follows the decision, particularly given the investigation into Chair Powell," DerHurahian said. "Investors are trying to understand the path forward for rate cuts later this year, with only about a one-in-three chance of a cut priced in by April and stronger odds pointing to June or July."

DerHurahian added that uncertainty over Powell's successor is an additional wild card, with betting markets recently favoring Rick Rieder, BlackRock's chief investment officer for global fixed income. Kevin Hassett, director of the National Economic Council, and former Fed governor Kevin Warsh had recently been considered the leading contenders.

The January meeting comes as President Donald Trump has intensified efforts to influence the Fed's monetary policy ahead of the expiration of Powell's term as chair in May.

Most recently, the Justice Department served the central bank with grand jury subpoenas related to Powell's testimony last June concerning renovations at the Federal Reserve's headquarters. Powell has characterized the subpoenas and the possibility of a potential indictment as part of the administration's broader campaign to pressure the Fed to lower interest rates.

Separately, Trump's effort to remove Fed Gov. Lisa Cook over alleged mortgage fraud remains unresolved, with the Supreme Court currently considering whether she can remain in her role as she challenges her purported removal.