US Federal Reserve: firmly in data watching mode

The US Federal Reserve left interest rates on hold in its meeting on 28 January 2026 at 3.50%-3.75%, with perhaps a less hawkish stance than expected.

No one expected any movement in interest rates and the market participants were far more interested in the tone of the meeting, how Chair Jerome Powell would respond to the recent Department of Justice (DoJ) subpoena and any speculation or thoughts regarding the new Fed chair to be appointed by US President Donald Trump.

The market paid little or no attention to the dissenting votes. Instead, the focus was on the slight change in stance from Fed Chair Jerome Powell.

Let’s look at the tone first. The committee saw two dissents from Stephen Miran and Christopher Waller who voted for a 25bps cut in interest rates. Governor Miran being Trump’s most recent appointment to the committee and Waller (also a Trump pick) a potential contender for next Fed chair. Perhaps a coincidence, but the market paid little or no attention to these votes. Instead, the focus was on the slight change in stance from Powell. He said that the recent data had painted a somewhat brighter picture in comparison to their last meeting, with stronger economic growth and tentative signs of labour market stabilisation. He did highlight some tensions between employment and inflation though, downplaying tariff impacts as one-time effects and focused on the unemployment rate as opposed to sharply slower job growth.

The main debate on the committee still boils down to the dual mandate. With inflation still above target, the dollar weakening and continued tariff uncertainty it remains to be seen how this will play out in the future path of inflation, especially if businesses continue to pass through higher import costs to the consumers. However, on the flip side the cooling labour market and resultant cooling labour costs may potentially lead to slowing consumption and dampen future growth expectations. As a result, the Fed is keen to sit on its hands for the time being and is firmly in data watching mode.

With regard to the three issues of future successors, Lisa Cook, and the DoJ probe, Chair Powell gave nothing away. Trump may be close to naming his pick, but Powell gave no opinion who this may be or on the timing of it. With regards to the DoJ probe he pointed reporters to his earlier statement, and on Lisa Cook he said it would have been wrong to not attend the Supreme Court hearing. So, in short, call it defiance or ambivalence towards President Trump, the more interesting development may be if he continues as a governor on the committee when his term ends in May 2026 and stymies another Trump appointment… that could create some fireworks!

The market reaction was almost as if the Fed meeting never happened. Pricing for 2026 remains at one to two interest rate cuts with the first fully priced for July 2026 (after Powell’s term which ends in May 2026). This is broadly in line with our expectations and that they should be in no hurry to do so unless the data warrants otherwise. So back to data watching for the time being!

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