The Federal Reserve's Federal Open Market Committee (FOMC) will convene January 27-28, 2026, for its first monetary policy decision of the year. After three consecutive 25-basis-point rate cuts in the second half of 2025, markets are now pricing in a near-certain pause at this meeting.
Current Situation
The federal funds rate currently stands at 3.50%-3.75%, down from 4.25%-4.50% in September 2025 after the Fed delivered three "insurance cuts" to prevent labor market deterioration. Financial markets, as measured by the CME FedWatch Tool, show approximately 94-95% probability that the Fed will hold rates steady at the January meeting, with only a 5-6% chance of an additional 25 basis point cut.
Economic Data
The Fed faces a challenging policy environment with conflicting signals from the economy.
| Indicator | Latest Reading | Trend |
|---|---|---|
| Federal Funds Rate | 3.50%-3.75% | Down 75 bps from Sep 2025 |
| Core PCE Inflation | 2.7%-2.8% | Above 2% target |
| December 2025 Payrolls | +50,000 | Well below expectations |
| CME FedWatch January Hold | 94-95% | Strong consensus |
| CME FedWatch January Cut | 5-6% | Minimal probability |
Key Factors
The labor market has shown signs of softening, with December 2025 nonfarm payrolls rising by only 50,000 jobs, marking one of the weakest readings in recent years. This deterioration was a primary driver behind the Fed's rate cuts in late 2025. However, Fed Chair Jerome Powell has emphasized the policy dilemma facing officials: "A very large number of participants agree that risks are to the upside for unemployment and to the upside for inflation."
Inflation remains above the Fed's 2% target. The most recent core PCE reading stood at approximately 2.8% year-over-year, suggesting that while price pressures are cooling gradually, they have not yet reached the Fed's comfort zone. This persistent inflation limits the Fed's ability to cut rates aggressively even as the labor market weakens.
Market expectations have shifted significantly. The CME FedWatch tool now projects only two rate cuts for all of 2026, tentatively scheduled for April and September. Major financial institutions including J.P. Morgan expect the Fed to hold steady through 2026 at the current 3.50%-3.75% range, with the next policy move potentially being a hike in 2027.
Analyst Forecasts
| Institution | January 2026 Forecast | 2026 Outlook |
|---|---|---|
| CME FedWatch | 94-95% hold | 2 cuts (April, September) |
| J.P. Morgan | Hold | No cuts in 2026, possible hike 2027 |
| Goldman Sachs | Hold | Next cut June/September 2026 |
| Barclays | Hold | Next cut mid-2026 |
| Morningstar | Hold | 1-2 additional cuts in 2026 |
The Fed is overwhelmingly expected to hold rates steady at the January 2026 FOMC meeting. With CME FedWatch showing 94-95% probability of no change, core PCE inflation still running above 2%, and Chair Powell signaling a cautious approach, the evidence strongly points to a pause. The next rate cut is unlikely until April 2026 at the earliest, and possibly not until the second half of the year.