Fed Holds at 3.75%, Political Heat Rising

The Federal Funds Rate stands at 3.75% as markets head into the January 28 FOMC meeting, with pricing signaling near certainty of a pause. Futures markets assign roughly a 97% probability that policymakers leave rates unchanged. This expectation reflects a steady message from Federal Reserve officials following three consecutive rate cuts last year. The focus now turns to how long the pause lasts rather than whether it begins.

The December meeting delivered a 25-basis-point rate cut, bringing the federal funds rate to a 3.50%–3.75% range, in line with market consensus and marking the third reduction of the year. The decision reflected a divided committee. Two FOMC members dissented in favor of holding rates steady, while newly appointed Governor Miran voted for a deeper 50-basis-point cut, signaling a more aggressive easing preference.

Rate table readings for December were revised to reflect this shift, with both the actual and forecast set at 3.75%, following the previous level of 4.00%. This adjustment aligns the data with the implemented policy move rather than the upper bound of the target range.

Looking ahead to January, expectations point to a pause. Markets now price the previous rate at 3.75%, with the forecast also holding at 3.75%, indicating broad agreement that policymakers will maintain current settings.

Source: ForexFactory

This outlook reflects a balance between easing inflation pressures and still-resilient economic activity, leaving the Fed positioned to assess incoming data before signaling its next move.

Inflation and Jobs Send Mixed Signals

Economic data paints an unusual picture. Inflation remains stuck near 3.0%, still above the Fed’s 2% target. At the same time, labor market conditions show only modest cooling. Recent jobs data pointed to slower hiring, yet unemployment edged lower and initial jobless claims stayed subdued. 

Growth adds another layer of complexity. Estimates suggest the U.S. economy expanded at an annualized 5.4% pace in the fourth quarter. Fast growth alongside easing job momentum raises questions. Is productivity surging, or does the economy risk overheating beneath the surface?

Market Pricing Reinforces the Pause Narrative

Market-based tools underline expectations for inaction. The CME FedWatch tool shows overwhelming odds of no change in January, with only a small chance of a 25 basis point cut. 

Investors now price the next move around mid-year. This shift signals confidence that policy sits close to neutral and that officials see no urgency to act. The message remains clear. Policymakers want firmer evidence that inflation cools further or that the labor market weakens more decisively.

Reaction Functions Point to Neutral Territory

Economists often examine how the Fed reacted in similar conditions. Models using post-2022 data highlight two variables that matter most. The first is the real policy rate, measured against core inflation. The second involves initial jobless claims as a real-time gauge of labor health. 

These models estimate a neutral real rate near 0.5%, implying a nominal neutral range between 2.5% and 3%. Current settings place policy slightly restrictive but not extreme, reinforcing the case for patience.

Politics Loom Over the 2026 Outlook

The January meeting unfolds amid growing political tension. President Donald Trump’s administration continues to push for lower rates to support growth and reduce debt servicing costs. Reports point to internal pressure for deeper cuts late last year. 

Chair Jerome Powell faces unprecedented scrutiny, including legal challenges, while his term as Chair ends in May 2026. That date now acts as a policy horizon. Markets increasingly expect leadership changes to influence decisions later in the year.

Dollar Weakness Reflects Governance Concerns

Currency markets already reflect these dynamics. The U.S. Dollar Index has slipped toward 97.00 as investors anticipate lower rates ahead. Falling yield expectations reduce the dollar’s appeal. At the same time, visible tension between the White House and the Fed introduces a governance discount. 

The euro trades near $1.19, while the pound hovers close to $1.37. Gold above $5,100 signals where some investors seek safety. Why choose the dollar when hard assets beckon?

What Comes After January?

The path beyond January fuels debate. Markets expect two to three cuts in 2026, while the Fed signals closer to one. This gap drives volatility. A firm Fed stance could lift yields and pressure risk assets. A shift toward market expectations could extend rallies across equities and metals. 

For now, the January meeting looks set to pass quietly. Yet beneath the calm, forces gather that could define monetary policy for the rest of the year.