Federal Reserve Holds Rates Steady, Backed by Solid Economy

By ariachiang

2026-01-29

The U.S. Federal Reserve announced on January 28, 2026, that it would maintain the federal funds rate target range at 3.5%–3.75%, marking the first pause since the rate-cutting cycle began in September 2025 and ending three consecutive 25-basis-point cuts. Recent economic data indicate that economic activity continues to expand at a solid pace. While the labor market has cooled, it has not shown signs of significant deterioration, with the unemployment rate edging down to 4.4% in December, the lowest level since January 2024. On the inflation front, core PCE inflation remains elevated at 2.8% year over year, still above the Fed’s 2% long-term target, suggesting that the disinflation process has slowed.

The decision to hold rates steady reflects a rebalancing of the Fed’s dual mandate of employment and price stability. As downside risks to the labor market have eased, policy focus has shifted toward the persistence of inflationary pressures. Consumer spending remains resilient, while initial jobless claims have stayed near historical lows of around 200,000, pointing to a “low-hire, low-layoff” equilibrium in which hiring has slowed but layoffs remain limited. In addition, expectations that tariff policies could push up prices in mid-to-late 2026 have reinforced the Fed’s cautious stance. On the political front, amid pressure from President Trump to cut rates and ongoing investigations, Fed Chair Jerome Powell has emphasized central bank independence, avoiding premature easing that could reignite inflation.

Overall, the decision underscores the Fed’s confidence in economic resilience while maintaining heightened vigilance toward inflation risks. Markets broadly expect the policy stance to remain unchanged at least through June, contributing to higher Treasury yields and keeping the S&P 500 fluctuating around the 7,000 level. Looking ahead, limited room for near-term rate cuts remains if inflation fails to cool further. Over the medium term, the Fed projects only one rate cut in 2026, alongside an upward revision of GDP growth to 2.3% on a YoY basis, a steady unemployment rate of 4.4%, and a decline in core PCE inflation to 2.5%. Investors should closely monitor the February CPI release and upcoming FOMC meetings to assess the timing of any potential policy shift.

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