FOMC meeting, January 27-28

• The minutes of the January 27–28, 2026 Federal Open Market Committee (FOMC) meeting show that “almost all” participants backed a federal funds rate hold at 3.50%–3.75%, judging policy to be broadly neutral after 75 basis points (bps) of easing in 2025 and preferring to assess the “extent and timing” of any further move.

• While Fed Chair Jerome Powell offered a nuanced description of policy during the post-FOMC press conference, the minutes carry a distinctly more hawkish tilt. While “several” policymakers see scope for further easing if inflation declines as expected, “some” would favor holding steady for some time, and a subset of these would not ease until disinflation is firmly back on track. Notably, “several” participants would have supported a two-sided statement explicitly keeping rate hikes on the table if inflation remains above target.

• This sets up an interesting dynamic if and when Kevin Warsh is confirmed as Fed Chair, succeeding Powell. While Warsh may enter with a perceived dovish bias, he will first need to demonstrate that his views are anchored in economic fundamentals rather than politics. He would then need to persuade a committee that appears increasingly hawkish and comfortable with policy near neutral.

• As such, Fed officials are likely to resume easing only for clear “good” reasons — convincing progress on inflation toward 2% — or “bad” reasons, a meaningful weakening in the labor market. We expect insufficient evidence of either in the first half of the year, keeping the Fed on hold at least until June. We have shifted our first rate cut to July (from June) and, while we still anticipate 50bps of easing in 2026 on moderating inflation and a mildly softer labor market, the risk of less easing is real.

Monetary policy

Against a backdrop of solid activity, low job growth but a stable unemployment rate, and inflation still above target, almost all participants favored holding the federal funds rate steady at 3.50%–3.75%. Following 75bps of easing last year, most judged policy to be within a broad range of neutral, leaving the FOMC well positioned to assess the “extent and timing” of any further adjustment based on incoming data and the evolving balance of risks — in effect, a Fed operating in neutral.

Christopher Waller and Stephen Miran, who dissented in favor of a 25bps cut, viewed policy as still meaningfully restrictive and saw downside risks to employment as more prominent than upside risks to inflation.

Looking ahead, several participants indicated that additional easing would likely be appropriate if inflation moved toward target. By contrast, some favored keeping policy steady for some time, and a number of those judged that further easing may not be warranted until there is clear evidence that disinflation is firmly back on track.

Importantly, several participants — not merely one or two — indicated that they would have supported a two-sided description of the FOMC’s future interest rate decisions, explicitly “reflecting the possibility that upward adjustments to the target range for the federal funds rate could be appropriate if inflation remains at above-target levels.” This reinforces that conditional tightening remains on the table should inflation fail to moderate.

This contrasts with Powell’s press conference nuance. He characterized the policy stance as loosely neutral or moderately restrictive, suggesting that a rate hike is unlikely to be the next policy move. Rather than signaling an indefinite hold, he outlined conditional pathways for easing — namely further progress on inflation in the second half of the year or renewed labor market weakening.

From a risk-management perspective, the vast majority judged that downside risks to employment have moderated, while the risk of more persistent inflation remains, with some noting that risks have come into better balance. Several cautioned that easing policy further amid still-elevated inflation could be misinterpreted as a diminished commitment to the 2% objective, potentially entrenching price pressures. Conversely, a few warned that keeping policy overly restrictive could risk a sharper labor market deterioration. The current stance reflects a deliberate effort to preserve flexibility while carefully balancing risks on both sides of the mandate.

Economic conditions and outlook

Participants characterized activity as expanding at a solid pace, with consumption remaining resilient and supported by gains in household wealth. That said, several noted a growing disparity: Spending remains firm among higher-income households, while lower-income consumers are showing signs of softness.

Business fixed investment continues to run robustly, particularly in technology and artificial intelligence (AI)-related sectors. Looking ahead, most Fed officials expect growth to remain solid into 2026, supported by favorable financial conditions, fiscal and regulatory policy, and ongoing AI-driven capital spending. Stronger productivity dynamics in recent years were also viewed as reinforcing the expansion.

Policymakers characterized the labor market as stabilizing after a period of gradual cooling. The unemployment rate has held steady, layoffs remain low and job openings have not deteriorated materially. However, hiring is also subdued, resulting in modest payroll growth. Firms appear cautious in adding headcount amid economic uncertainty and ongoing questions around AI and automation, while lower net immigration has weighed on labor supply and contributed to softer job gains.

While most participants see conditions stabilizing — and downside risks somewhat diminished — the outlook remains uncertain. Several indicators, including survey measures of job availability and elevated part-time employment for economic reasons, continue to point to underlying softness. Moreover, the low-hiring environment raises the risk that any renewed decline in labor demand could translate quickly into higher unemployment. Participants also flagged the concentration of job growth in a narrow set of less-cyclical sectors as a source of fragility, potentially masking broader labor market vulnerability.

Policymakers stressed that inflation has eased materially from its 2022 highs but remains above the 2% objective. Recent firmness has been concentrated in core goods, largely reflecting tariff effects, while core services — particularly housing — continue to disinflate and provide offsetting downward pressure.

Most participants expect inflation to converge toward target as tariff effects fade in the second half of the year, supported by ongoing housing disinflation and potentially stronger productivity growth as firms automate and absorb costs rather than fully pass them through.

That said, several cautioned that progress could be slower and more uneven, with some business contacts anticipating tariff pass-through extending into 2026 and demand pressures keeping inflation elevated. Importantly, longer-term inflation expectations remain well anchored, with near-term expectations having moderated from prior peaks.

On financial stability, participants flagged elevated asset valuations and compressed credit spreads, alongside concentration risks and leverage tied to the AI buildout. Vulnerabilities in private credit, hedge fund leverage and pockets of consumer balance sheets — particularly among lower- and middle-income households — were cited as areas warranting close monitoring.

Fed staff economic outlook

The Fed staff revised up the growth outlook, with real GDP expected to run above potential through 2028 as the tariff drag fades and fiscal policy and financial conditions continue to support demand. With activity outpacing potential, the unemployment rate is projected to gradually decline, move below its natural rate by year-end, and remain there over the forecast horizon. The inflation path was marked slightly higher on tighter resource utilization and firmer core import prices, though price pressures are still expected to resume a disinflationary trend as tariff effects wane around midyear.

Uncertainty remains elevated — reflecting geopolitics, policy shifts, AI dynamics and data-quality issues — leaving risks to growth and employment skewed to the downside, while inflation risks remain tilted to the upside amid concerns about persistence above 2%.