Key points:
- The Federal Open Market Committee (FOMC) held the target federal funds rate steady today at 3.5% to 3.75%, in line with market expectations.
- The pause signals a desire to assess the effect of the Committee’s three consecutive cuts in late 2025 before moving further.
- The continuation of the labor market’s low-fire/low-hire dynamic (or lack thereof) will likely be a key determinant for the FOMC’s rate decisions in the coming months.
The FOMC voted today to keep the federal funds rate unchanged, indicating a more cautious approach following three consecutive 25 basis-point rate cuts late last year. While the decision was widely anticipated by markets, it reflects broad uncertainty about the path of interest rates in 2026, as the Fed prefers to wait and see how the economy develops before making further changes in either direction. Notably, the decision was not unanimous, with two FOMC members voting to cut rates by 25 basis points.
The Fed’s caution comes against the backdrop of cooling but elevated inflation and a labor market that remains afloat, but has sprung a number of concerning leaks. Headline CPI came in at 2.7% year-over-year in December 2025, an improvement over 2.9% in December 2024, but still well above the Fed’s 2% target. Meanwhile, unemployment gradually rose throughout 2025, from 4% in January to 4.4% in December.
As the Fed assesses its path forward, labor-market churn will likely serve as a decisive barometer. If unemployment stays low while inflation continues to ease, the Fed can likely afford to be patient and consider additional cuts later in 2026. That is likely what happens if the low-fire/low-hire dynamic we’ve experienced over the past year remains in place. But if hiring slows too much, or layoffs begin to rise, this dynamic may break and encourage the FOMC to cut rates more aggressively.
