The Fed and Interest Rates: Why Rates Aren’t Coming Down Yet

The Federal Reserve maintained interest rates, prioritizing stable employment and 2% inflation goals while monitoring economic data for future policy adjustments.

• Federal Reserve kept interest rates unchanged due to solid economic growth, stabilizing employment, and elevated inflation.

• Future rate cuts depend on incoming data, specifically a weakening labor market or sustained lower inflation.

• US federal budget deficit is on an unsustainable path, requiring urgent attention despite current stability.

The Federal Reserve's Federal Open Market Committee (FOMC) decided to keep interest rates unchanged on January 28th, citing a solid US economic expansion, stabilizing labor markets, and still elevated inflation. This decision aligns with their dual mandate of maximum employment and stable prices, following three previous rate cuts totaling 75 basis points. Future rate decisions will be made meeting by meeting, guided by incoming data and the evolving balance of risks to both employment and inflation.

Fed's Rate Decision Rationale

• 00:00:30 The Federal Reserve's FOMC chose to leave its policy rate unchanged because the US economy expanded at a solid pace and is on firm footing entering 2026. While job gains have been low, the unemployment rate shows signs of stabilization, and inflation remains somewhat elevated. The current monetary policy stance is deemed appropriate to promote progress toward both maximum employment and the 2% inflation target.

Future Rate Cut Conditions

• 00:01:51 The timeline for any further rate cuts is not fixed, as decisions will be made meeting by meeting based on incoming data, implications for the outlook, and the balance of risks. A weakening labor market would clearly argue for loosening monetary policy, but inflation trends would also be a critical factor. The Federal Reserve looks at a combination of both labor market conditions and inflation to guide its policy actions.

Risks to Dual Mandate

• 00:03:42 Previously, the Federal Reserve cut rates due to a weakening labor market, but now the risks to both variables of their dual mandate — inflation and employment — have diminished. Jerome Powell stated that the upside risk to inflation is a little less, and the downside risk to employment is also a little less. The central bank is not prioritizing one over the other but notes that the overall risks to both have decreased.

Long-Term Fiscal Concerns

• 00:06:10 Jerome Powell expressed concern that the US federal budget deficit is on an 'unsustainable path,' despite the current level of debt being sustainable. He noted that the country is running a very large deficit even at essentially full employment, and the fiscal picture needs to be addressed, but is not currently being acted upon. While not connecting it to near-term market events, Powell believes that ultimately, this situation will lead to a difficult endgame if unaddressed.