Event
The U.S. Federal Open Market Committee (FOMC) concluded its meeting on 27-28 January
2026, maintaining the federal funds rate at 3.50%–3.75% after delivering 75 bps of
cumulative easing over the prior three meetings. The Committee framed its decision around
a more balanced trade-off between stabilising labour-market conditions and inflation that
remains above target, signalling a shift into a more patient phase of the easing cycle.
Key points to note:
1. Split vote reflects easing tensions between inflation and labour risks
The FOMC voted 10–2 to keep rates unchanged, with Governors Stephen Miran and
Christopher Waller dissenting in favour of an immediate 25 bps cut. Chair Powell
characterised the decision as broadly supported, noting that the tension between
inflation and unemployment has eased relative to earlier in the cycle, allowing the
Committee to adopt a more balanced policy stance.
2. Inflation eased from its peak while labour stabilize
Powell reiterated that inflation has eased significantly from its mid-2022 highs but
remains somewhat elevated relative to the Fed’s 2% target. He noted that recent
inflation readings have been influenced by higher prices stemming from tariffs, while
disinflation appears to be continuing in the services sector. At the same time, labour
market conditions are showing signs of stabilisation following a period of gradual
softening, with the unemployment rate broadly unchanged. Taken together, this
backdrop supports a patient, data-dependent approach to future policy decisions.
3. Fed reaffirms focus on both sides of the dual mandate
Powell reiterated that monetary policy remains guided by the Fed’s dual mandate of
maximum employment and stable prices. He emphasised that decisions will continue to
balance progress on inflation with developments in the labour market, reinforcing a
two-sided risk-management approach rather than a singular focus on inflation.
4. No forward guidance with a meeting-by-meeting approach reaffirmed
The Fed made clear it has not taken any decisions regarding future rate moves. Powell
pushed back against expectations of a pre-committed easing trajectory, reiterating that
policy decisions will be made on a meeting-by-meeting basis, guided by incoming data,
the evolving outlook, and the balance of risks.
Outlook:
We expect the Fed to keep policy rates unchanged in the near term, with the next rate cut
in June, broadly in line with market pricing. Improving labour-market conditions and inflation
that remains above the Fed’s 2% target give policymakers room to stay on hold for now,
reinforcing a pause through the first half of the year.
We think that rate cuts will only resume once inflation shows clearer progress beyond tariff
related effects or labour conditions begin to soften meaningfully. Chair Powell made clear
that rate hikes are not the base case, with the bar for tightening set very high. Instead, the
easing path is likely to be gradual and data-dependent, with tariff-driven goods inflation
expected to peak and fade over the year. If the disinflation materialises without a re
tightening in the labour market, it would open the door for further cuts later in the year.
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