MNI FED WATCH: Holding Steady With Rates Near Neutral

The Federal Reserve is expected to keep its benchmark overnight rate on hold this week after lowering rates in each of the three final meetings of 2025, and to signal little willingness to make a change until further inflation progress is seen in the data. 

Several policymakers have said ahead of the blackout period that the policy stance is close to neutral and the bar for continued easing is higher. Current policy “leaves us well positioned to determine the extent and timing of additional adjustments” based on incoming data, Fed Vice Chair Philip Jefferson said Jan 16. 

Governor Stephen Miran is likely to dissent again in favor of immediate easing, but he has little support on the committee. (See: RPT-MNI INTERVIEW: Miran Sees Substantial Rate Cuts In 2026)

The Fed may wait until the second half of the year to cut again as they monitor sticky inflation and productivity data, former Fed officials told MNI. (See MNI INTERVIEW: Fed In Watch Mode Through 1H, Lockhart Says) 

STRONG GROWTH

The economy has maintained solid momentum to start the year. Robust consumer spending propelled third-quarter growth to an upward revised 4.4%, six-tenths faster than the second quarter, and increased solidly again in November and October.

Tariff policy uncertainty that clouded the outlook last year is expected to lift in 2026, with President Donald Trump's tax cuts and deregulation efforts expected to help growth.  

The latest data also suggest the labor market is stabilizing. Breakeven hiring numbers have fallen to under 50,000 a month after a year of immigration curbs, and jobless claims are hovering at very low levels. 

The unemployment rate backed down in December to its September level of 4.4%, maintaining the unusual low-hiring-low-firing balance as firms pivot toward technological investment and the economy benefits from faster productivity growth. (See MNI POLICY: Fed Warms To Productivity Step-Up, Rethinks Risks)

INFLATION TREND

A strong labor market provides the Fed with the necessary leeway to keep interest rates moderately restrictive to ensure inflation returns to its 2% target without causing a major downturn. (See MNI INTERVIEW: Fed Close To Done Cutting Rates, Says Harker)

Core PCE inflation remained well above target at 2.8% in November, but policymakers appear confident inflation will continue to cool in 2026. (See MNI: Musalem Warns Easy Fed Policy 'Unadvisable')

Fed Chair Jerome Powell acknowledged last month that the risk that high tariffs will touch off spiraling price hikes has diminished, but officials are also watching start-of-year effects in case of significant price resets by businesses. (See MNI INTERVIEW: Fed Strategy Shift Delays Price Progress-Koenig)