The Federal Reserve (Fed) is facing a turning point: after three consecutive rate cuts, it is now signaling a phase of stability. For the January meeting, Jörg Held, Head of Portfolio Management at ETHENEA Independent Investors S.A., expects the Fed to leave the policy rate unchanged within the range of 3.50% to 3.75%. Policymakers view the current monetary policy stance as “well positioned” and are likely to adopt a cautious wait-and-see approach to assess the effects of the previous easing measures. Held’s detailed assessment:

“Recent developments suggest that the Fed now views the risks to price stability and the labor market as more balanced:

- Inflation dynamics: Inflation remains the key concern. After a slight increase in recent months, the inflation rate continues to run above the 2% target. Experts also warn that the relatively moderate readings of the PCE core price index in October and November were distorted by the government shutdown. As these effects fade and tariff-related costs are passed through, a renewed firming of inflationary pressure is expected by April 2026.
- Labor market resilience: Despite slower job growth, the labor market remains resilient. The unemployment rate fell to 4.4% in December, while initial jobless claims have remained stable. Observers interpret the decline in employment figures in the fourth quarter as a one-off effect (caused in part by retirements linked to the activities of the Department of Government Efficiency (DOGE)) rather than a sign of structural weakness.
- Monetary policy framework: The Fed continues to emphasize its independence from political pressure. While a ‘dovish’ dissenting vote from Governor Miran calling for a 50-basis-point cut is expected, the majority remains committed to the current course. In addition, short-term government bonds continue to be purchased to ensure sufficient liquidity in the banking system.”

Outlook: Only a Temporary Pause in the Easing Cycle

The upcoming January meeting marks a strategic pause before the Fed is likely to resume its easing cycle later in 2026. Despite the current wait-and-see stance and short-term inflation risks stemming from tariffs, we continue to expect further rate cuts. Once the data distortions caused by the shutdown have fully cleared, we anticipate that the Fed will steer the policy rate toward its neutral level of 3.00% to 3.25%.