As was widely expected, the Federal Open Market Committee (FOMC) decided to pause their rate cuts at the January meeting, keeping the fed funds trading range at 3.50%–3.75%. For those keeping track, the Fed had lowered ‘the funds rate’ by 75 basis points (bps) during the final three FOMC meetings of 2025. Now, the question becomes, is this just a pause that ‘refreshes,’ or are policymakers shifting their decision-making process to the next phase?

Count me in the camp that the Fed is reassessing their stance on rates. I would agree with the notion that monetary policy is still skewed more than likely towards further easing, but I would also recognize that the financial markets will be operating in a scenario where rate cuts are either near, or at the end, of this easing cycle.

Based upon the broader economy coming out of 2025, there did not appear to be a need to enter an ‘accommodative phase’ for policy, but perhaps just get back to ‘neutral’. This is a point Powell & Co. have been making as well. Now what is a neutral fed funds rate? That is the key question. If you believe it begins at perhaps 3.50%, then we are essentially at neutral, or very close.

Why are Fed rate cuts potentially in the latter innings? Since this rate cut cycle began in September 2024, Powell & Co. have reduced fed funds by a total of 175bp. Perhaps more importantly in terms of reference, let’s go back to my opening paragraph: the Fed has cut rates by 75bps just over the last three to four months. In other words, you can make the case the Fed may now be far less behind the curve than where they were pre-September. Or, taking it even one step further, perhaps monetary policy is no longer behind the curve.

This point has been underscored by many of the regional Fed Bank presidents, and at times, has created an impression of the Fed being a ‘house divided.’ This development could be on display throughout the 2026 FOMC meeting calendar. While current Chairman Powell will be at the helm for two more FOMC gatherings this year, a new Fed Chair will be leading the way for the remaining eight meetings this calendar year, assuming of course Trump’s nominee gets approved on a timely basis. As a result, as we saw at the December FOMC convocation, multiple dissenters could become more of the norm as compared to what investors are accustomed to seeing.

The Bottom Line

Again, I can’t emphasize enough how the Fed, and of course the money and bond markets, are now back to being highly data dependent. While the Fed operates under its dual employment and inflation mandate, it continues to appear that the labor market data is more of the ‘wild card’ for future policy decisions. With inflation still almost a percentage point above the Fed’s own 2% target, the FOMC will need to see additional cooling in the labor markets to spur additional rate-cutting action.