MNI Fed Review - Jan 2026: Patient FOMC Treads Neutral Path

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EXECUTIVE SUMMARY:

The FOMC treaded a largely neutral path with its January decision, maintaining its easing bias but sounding slightly more patient in making its next move than it did last month. Markets took a very mildly hawkish interpretation with implied rates rising under 1bp for meetings to July but even less of a move further out, and the dollar remaining largely unmoved. As it stands, there is under 4bp of cuts priced for the next meeting in March.

• The Statement leaned marginally more hawkish in tone vs the previous edition but no moreso than was warranted given solid data since the December meeting and the Committee's clear shift to a "wait and see" stance on rates. It was edited to reflect more solid-than-expected economic growth and labor market data since December's meeting, no longer noting that "downside risks to employment rose in recent months". However the more substantive part of the statement - the forward rate guidance - was unchanged, continuing to say the FOMC was "considering the extent and timing of additional adjustments".
• While Chair Powell said there was "broad support" on the Committee for holding today, including among non voters, Govs Miran and (in a very mild surprise) Waller dissented in favor of a 25bp cut, with the latter seeing a slight boost in his prediction market-implied probability of being named Fed Chair.
• In the press conference, Chair Powell (as expected) refused to answer questions about his own future or the Department of Justice investigation into the Fed. But headlines published during the press conference reported US Tsy Sec Bessent saying that President Trump's Chair pick may come in the next week or so somewhat overshadowed proceedings.
• On the monetary policy front, Powell at times sounded very relaxed on the current policy configuration, with the opening statement of the press conference including the line: "we see the current stance of monetary policy as appropriate to promote progress toward both our maximum employment and 2% inflation." When asked whether the Committee's timeline for rate cuts had been pushed back, he pointed out that since December there has been a "clear improvement in the outlook for growth". And multiple times he noted both "the upside risks to inflation and the downside risks to employment" have "diminished".
• But Powell also said that current rates were at the "higher end" of the range of plausible estimates of neutral, implying that there was further room to come down. He highlighted "ongoing disinflation" across services, and the expectation of goods disinflation over 2026 as tariff impacts wane. Finally, he emphasized that a rate hike was not any participant's base case for the next move.
• Attention turns to a potentially busy schedule next week, which may include the long-awaited announcement of Powell's would-be successor (Blackrock's Rieder and ex-Fed Gov Warsh remain the front-runners). If a federal government shutdown is avoided, we will get January nonfarm payrolls next Friday too.

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