January FOMC: Why the Fed is expected to stand still as markets look ahead

The Federal Reserve is expected to stand still today because it cannot afford to move, analysts say. With inflation stuck near 3%, unemployment edging higher, and economic growth running far hotter than expected, the January FOMC meeting is set to deliver a rate hold that reflects caution rather than confidence. Markets are not expecting policy action, but they are watching closely for what Chair Jerome Powell says about where the next move might come from.

Futures markets are pricing in a roughly 97% probability that interest rates remain unchanged, shifting attention firmly toward the second half of 2026. 

Alt text: Table showing probability distributions for U.S. Federal Reserve interest rate decisions across 2026 meeting dates.

Source: LSEG

With GDP growth tracking at an annualised 5.4% and political pressure on the Fed intensifying, today’s meeting is less about interest rates and more about credibility, independence, and timing.

What’s driving the January FOMC decision?

The Fed’s decision to stay on hold today is rooted in an unusual economic split. The US economy is growing rapidly, yet the labour market is cooling rather than overheating. Unemployment has risen to 4.4%, while hiring has slowed across several sectors, challenging the traditional link between strong growth and job creation.

At the same time, inflation remains uncomfortably high. Consumer prices have climbed back to around 2.7–3.0%, well above the Fed’s 2% target. A major contributor has been tariffs, which have pushed the effective US tariff rate close to 17%, according to Yale Budget Lab estimates. Those higher import costs, running at nearly $30bn per month, are feeding through to retail prices despite efforts by large firms such as Walmart and Amazon to absorb some of the impact.

This combination leaves the Fed boxed in. Cutting rates risks reigniting inflation just as price pressures are firming. Holding rates, however, risks further weakening the labour market. Today’s decision reflects the Fed’s judgment that inflation risks still outweigh growth concerns.

Why it matters

For policymakers, today’s meeting reinforces how narrow the path has become. The Fed’s dual mandate of stable prices and maximum employment is pulling in opposite directions, forcing officials to prioritise inflation control even as unemployment rises. That tension explains why today’s statement is expected to offer little guidance on timing future cuts.

Bank of America expects Powell to emphasise patience and data dependence rather than signalling policy shifts. The focus is likely to be on whether the current strength in growth implies a higher neutral interest rate, a view that would justify keeping rates restrictive for longer. Political context may also loom larger than usual, as the Fed seeks to avoid appearing reactive amid growing pressure from the White House.

Impact on markets, borrowers, and FX

For households and businesses, a Fed on pause means limited near-term relief. While the central bank does not set mortgage or loan rates directly, its stance influences Treasury yields, which underpin most lending costs. With policy rates unchanged, borrowing costs for mortgages, credit cards, and business loans are likely to remain elevated.

In financial markets, attention has already shifted beyond today’s meeting. The US dollar has weakened, with the dollar index slipping toward the 97 level as traders price in eventual easing and apply what some analysts describe as a “governance discount” to US assets. 

The euro has climbed toward $1.19, while sterling has risen to near $1.37, supported by expectations of a global soft landing.

Gold’s rally above $5,100 tells a similar story. Rather than flocking to the dollar in uncertain times, investors appear increasingly drawn to hard assets as political friction clouds confidence in US monetary policy.

Expert outlook: What markets are really waiting for

Most analysts agree that today’s FOMC meeting is a checkpoint rather than a turning point. Goldman Sachs expects the Fed to remain on hold for several more months, forecasting two rate cuts in 2026 beginning around June. CFRA’s Sam Stovall shares that view, arguing the Fed will wait until inflation shows clearer signs of easing before acting.

Politics, however, complicates the outlook. Chair Jerome Powell’s term ends in May 2026, and markets are increasingly sensitive to what comes next. Rabobank has described the current environment as the “eye of the storm”, suggesting that expectations for a June rate cut are tied as much to potential leadership changes as to economic data. If markets are wrong about a more dovish future Fed, volatility across bonds, equities, and currencies could rise sharply.

Key takeaway

Today’s January FOMC meeting confirms that the Federal Reserve is choosing caution over conviction. With inflation still too high and growth surprisingly strong, the Fed sees little room to move. Markets are already looking beyond today, focusing on mid-2026 and the political and economic shifts that could finally unlock the next phase of policy. What Powell says now may matter less than what changes in the months ahead.