The Federal Reserve left interest rates unchanged at its January meeting, pointing to a labor market that has cooled significantly over the past year but has not shown the kind of sharp downturn that some feared.
After 3 consecutive cuts aimed at guarding against rapid job-market deterioration, the central bank has made it clear that it’s now in “wait-and-see” mode.
Read on for more on why the Fed hit “pause,” whether more rate cuts may lie ahead this year, and how investors should be interpreting the Fed’s politically tense backdrop.
A better-than-feared jobs picture
The Fed’s decisions are always grounded in its “dual mandate” of achieving low unemployment and low-but-stable inflation.
The Fed’s previous rate cuts over the past few months were intended to help head off a weakening job market. Job creation had fallen significantly in 2025, at times even turning negative, and the unemployment rate had been drifting higher. In particular, Fed members have been closely attuned to any risk of a “nonlinear deterioration” in the labor market, says Aditi Balachandar, research analyst on Fidelity’s fixed income team—meaning the risk of accelerating job losses that could spiral into broader economic weakening or even recession.
While the job market hasn’t rebounded from the softness seen in 2025, more recent data has seemed to put those fears of a steeper deterioration to rest. The unemployment rate fell slightly in its most recent reading, job creation has been low but positive in the past 2 months, and unemployment claims have been low—signaling the job market is still sluggish, but there are no signs of widespread layoffs.
“There hasn’t been further deterioration in the labor market,” says Andrew Garvey, lead monetary policy analyst on Fidelity’s Asset Allocation Research Team. “If there's no evidence of labor market deterioration, there's no reason to continue to cut.”
A murky inflation picture
On the other side of the Fed’s mandate, inflation remains a risk—which further weighs against immediate additional cuts.
The Fed’s preferred inflation measure, the Personal Consumption Expenditures Index excluding food and energy (aka “core PCE”) rose in its most recent reading. Some other inflation measures were softer than expected in December (notably the Consumer Price Index excluding food and energy). But there are some lingering data distortions stemming from the October to November government shutdown.
“Recent inflation releases have not been clean readings,” says Balachandar. “There’s been some noise in the data due to the effects of the government shutdown.”
The inflation rate has now been running above the Fed’s 2% target for almost 5 straight years. And inflation could potentially remain sticky for some time due to pressures from tariffs, a tight housing market, and the labor market.
Adding it up: The Fed returns to “wait-and-see” mode
At the same time, there is relatively broad agreement that the fed funds rate is now roughly in “neutral” territory—meaning, at a level that neither decelerates nor accelerates the economy. That makes the current rate an appropriate point at which to pause.
“Given the balance of risks, the Fed is in a position where they can wait to see how the labor market and inflation data develop from here,” says Garvey.
Are more rate cuts coming this year?
The Fed did not release new economic projections or an updated dot plot at this meeting. Its December 2025 dot plot suggested that just one further rate cut might be on the table in 2026 (based on the median dot). Investors have generally been expecting 1 to 2 further cuts this year, based on expectations implied in derivatives markets.
But whether the Fed cuts further this year will depend on how the data evolves—particularly given the way its 2 mandates continue to pull in opposite directions (a weak job market generally weighs in favor of cutting rates, while high inflation generally weighs in favor of keeping rates high).
“If there are further signs of labor market weakness, the Fed has the ability to respond to that with additional cuts,” says Balachandar. “But if there are signs that inflation requires their attention they could remain on hold.”
A politically tense backdrop—but a committee-driven institution
This year’s policy landscape is unfolding against a politically charged backdrop. In particular, with Jerome Powell’s term as chair ending in May, some investors have wondered whether a new chair could be more inclined to support rate cuts.
But it’s important to remember that US monetary policy has never been the domain of a single individual. Fed decisions are structured as a committee process. And the committee includes some members who place heavier emphasis on inflation risks—as reflected in recent hawkish dissents—which limits the ability of any incoming chair to move quickly toward rate cuts.
“Any new chair still needs to convince the rest of the committee to go along with them,” says Garvey.
A new leader might be able to nudge the committee’s focus at the margins, but is unlikely to precipitate an overnight change in direction.
What should investors do right now?
There are no obvious answers as to how rates will unfold from here. While a further modest decline in the fed funds rate could potentially be on the table this year, that expectation could always shift—in either direction—as new data comes in. And long-term interest rates can be even more difficult to forecast, given the many forces that drive them.
Urgent-sounding headlines around the future of the Fed may make investors feel as though they need to do something. But rather than trying to anticipate each policy move, many investors might be better served by an investing plan that’s suited to their goals, needs, time horizon, and risk tolerance, and that they can stick with through a variety of interest-rate and market environments.
If you need help making a plan (or making one you can stick with), you can learn more about how we can work together.