Published on: 2026-01-26
Rate cuts are back on the table, but the Federal Reserve is not in a hurry. After several rate cuts in 2025, the Fed has entered 2026 with inflation still above target and mixed signals from the job market.
The January 2026 FOMC meeting is expected to be a pause, not a cut, as CME FedWatch probabilities indicate a high likelihood of no change.
For traders, the bigger question is timing. A cut in the wrong month can move the US dollar, gold, and equity indices in a matter of minutes. Thus, knowing what the Fed needs to see, and when it has the chance to act, matters as much as the decision itself.
As of late January 2026, before the first Federal Reserve meeting of the year, the federal funds target range is set at 3.50% to 3.75%.
According to the Fed's December 2025 projections, the median policymaker expected the policy rate to be approximately 3.4% by the end of 2026. This expectation aligns with roughly a quarter-point reduction from the current level.
That said, the Fed can choose to act or remain passive based on data. The most realistic windows for a first cut are usually meetings where the Fed has fresh clarity on inflation and labour trends, which often point to mid-year rather than early spring.
Simply put, here is the setup traders are watching most closely:
Base case: The Fed stays on hold early in 2026, then cuts once later in the year if inflation cools and hiring softens.
Earlier cut risk: A cut comes sooner if unemployment rises sharply or financial stress builds.
Later cut risk: Cuts get pushed out if core inflation stays sticky or growth re-accelerates.
Recent US data delivered a mixed picture, supporting a "wait and watch" Fed in early 2026.
Headline CPI rose 2.7% year on year in December 2025.
Core CPI (excluding food and energy) rose 2.6% year on year in December 2025.
Headline PCE inflation rose 2.8% year on year in November 2025, and core PCE inflation also rose 2.8% year on year.
This mix signals to the Fed that inflation has cooled, but it also shows that inflation is not yet at the target.
Nonfarm payrolls rose by 50,000 in December 2025.
The unemployment rate was 4.4% in December 2025.
Average hourly earnings rose 3.8% year on year in December 2025.
Job growth appears weak, and the Fed will take this seriously as it has already flagged risks to employment.
Real GDP grew 4.4% (annualised) in Q3 2025, according to BEA's updated estimate.
The Atlanta Fed's GDPNow estimate for Q4 2025 was 5.4% as of 22 January 2026.
Strong growth is not a guarantee that 2026 remain strong, but it does reduce urgency for immediate cuts.
In short, this mix explains why the Fed can justify patience. Inflation is not yet at target, and the labour market is not breaking down.
The best "official" roadmap for 2026 is still the Fed's own projections, even though the Fed stresses they are not promises.
In the December 2025 Summary of Economic Projections (SEP), the median participant forecast shows:
PCE inflation: 2.4% in 2026.
Core PCE inflation: 2.5% in 2026.
Unemployment rate: 4.4% in 2026.
Real GDP growth: 2.3% in 2026.
Federal funds rate (end of year): 3.4% in 2026, versus 3.6% in 2025.
Additionally, in the December 2025 projections, the median path looked like this:
| Fed projection (median) | End-2025 | End-2026 | End-2027 | Longer run |
|---|---|---|---|---|
| Federal funds rate (midpoint, %) | 3.6 | 3.4 | 3.1 | 3.0 |
So, the Fed's own median view is not "aggressive easing." It is closer to "one cut, if inflation cooperates."
The Fed has eight scheduled meetings in 2026, and four of them include updated projections (SEP).
| 2026 FOMC meeting | Dates | SEP meeting? | Why this meeting matters |
|---|---|---|---|
| January | 27–28 | No | Sets the tone for early-2026 patience |
| March | 17–18 | Yes | New forecasts can shift the "cut map" |
| April | 28–29 | No | Clean window if data breaks sharply either way |
| June | 16–17 | Yes | Mid-year inflection point, fresh projections |
| July | 28–29 | No | Often a live meeting if trends are clear |
| September | 15–16 | Yes | Another projection reset before year-end |
| October | 27–28 | No | Late-year adjustment meeting |
| December | 8–9 | Yes | Sets the 2027 narrative and the year-end rate path |
Key takeaway: If the first cut happens in 2026, it will likely occur when the Fed can point to a clear run of inflation and labour data. That tends to favour June, July, or September as the cleanest "decision points," unless a surprise forces earlier action.
The Fed's preferred inflation measure is the PCE, which excludes food and energy to reflect underlying inflation better. In November 2025, core PCE was 2.8% year-over-year.
For rate cuts to become easier to justify, the Fed will want to see:
Several months where core inflation prints are calm, not jumpy.
Service inflation is easing, not just goods prices.
A path that looks consistent with the Fed's own forecast of 2.5% core PCE in 2026 (median projection).
In December 2025, the unemployment rate was 4.4%.
A normal cooling job market can still be consistent with "higher for longer." A more rapid economic decline swiftly shifts the discussion, especially if job losses become widespread across sectors.
The Fed's December projections put unemployment at 4.4% in 2026 (median), which suggests policymakers were not expecting a major jobs shock.
In its December projections, the Fed's median expectation for real GDP growth in 2026 was 2.3%.
If growth undershoots that path and forward-looking indicators weaken together, the Fed will become more comfortable with cuts, even if inflation is not exactly at 2%.
Sometimes the Fed cuts because markets do the tightening for it. Credit spreads, bank lending standards, and liquidity conditions can tighten quickly after a shock.
If that tightening threatens the real economy, the Fed can respond even if inflation is still a little high.
No timeline is certain. However, a useful way to think is in scenarios that we used to match the data.
This path fits the Fed's median projection for a lower year-end rate in 2026.
This path also aligns with market commentary suggesting cuts later in the year rather than immediately.
In this base case, the first cut is most plausible around July or September, because the Fed will want more time to confirm that inflation is not rebounding.
This path needs a clearer break in the labour market.
A sustained rise in unemployment, combined with continued easing in core inflation, can make June a live meeting.
If growth remains stable and inflation does not continue to decline, this path becomes more likely.
It also becomes more likely if the Fed worries that premature easing could reignite inflation expectations.
The next scheduled meeting of the Federal Open Market Committee (FOMC) will take place on January 27–28, 2026. The markets heavily expect the Fed to hold rates steady at that meeting.
In the December 2025 projections, the projected median federal funds rate for the end of 2026 was 3.4%. From today's level, that is consistent with a one-quarter-point cut, although it is not a guarantee.
June, July, and September often stand out because they sit after several inflation and jobs releases, and June and September also come with updated projections.
The dot plot and SEP are conditional on each participant's view of "appropriate policy" under their assumptions. If inflation, jobs, or growth change, the "appropriate" path changes.
In conclusion, the Fed has room to be patient at the start of 2026, as inflation remains above target and growth has not collapsed.
The Fed's projections indicate a gradual approach, suggesting one cut by year-end rather than a rapid easing cycle.
For traders, the best edge is often preparation: know the 2026 meeting dates, track the inflation and jobs trend, and respect how quickly pricing can shift.
Disclaimer: This material is for general information purposes only and is not intended as (and should not be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by EBC or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.
