WASHINGTON, DC – JUNE 18: Federal Reserve Board Chairman Jerome Powell holds a news conference following a Federal Open Market Committee meeting on June 18, 2025 in Washington, DC. Despite President Trump’s call for an interest-rate cut Powell announced that the central bank’s benchmark interest rate will remain unchanged at a range of 4.25% to 4.5%. (Photo by Win McNamee/Getty Images)
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Recent economic data has maintained the view that the Federal Open Market Committee is less like to cut interest rates at their next scheduled meeting on January 27-28. This is something Fed Chair Jerome Powell alluded to on December 10. It’s also consistent with the general outlook that interest rates are expected to move lower in 2026, but not at an aggressive pace. Jobs data has come in a little better than expected for November, and inflation is still above the FOMC’s 2% annual goal. As a result, fixed income markets forecast a 1 in 4 chance of a January cut today. It’s possible, but less likely.
Jobs Data Appears Soft
The recent jobs report for November has various moving parts to it, but did not signal a collapse in employment that could have worried the FOMC and encouraged lower interest rates. Jobs growth has seen little change since April, but November’s data did see 64,000 nonfarm payrolls added due mainly to growth in the healthcare and construction sectors. That’s muted growth, especially compared to recent years where monthly nonfarm payroll growth of over 100,000 was common.
In addition, deportations may be impacting the numbers and leading to lower job growth, but in a way that might present lower economic risk. That said, unemployment continues to move up, now to 4.6% and even though the increase has been gradual up to November’s report, rising unemployment has historically elevated recession risk.
As such the jobs report for November was not great news, but nor was it a surprise to the FOMC who wrote in the December 10 statement, “Job gains have slowed this year, and the unemployment rate has edged up through September.” November’s data appears to have continued a similar trend.
Inflation Remains Above Target
The other part of the FOMC’s mandate is inflation, and November’s data showed that inflation remains materially above target. The 0.3% monthly increase was among the highest increases for 2025. Headline inflation has broadly moved up since April 2025 and stripping out food and energy costs, inflation has shown less of a clear trend, but is not moving materially lower. Generally most prices are increasing, not at an alarming rate, but above the FOMC’s 2% target. On December 10, Powell discussed that tariffs were likely causing a one-off rise in prices for impacted sectors, but that trend may peak and start to ease in the first quarter of 2026.
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What To Expect
With inflation above target and jobs growth slowing, the FOMC may be content to leave interest rates at their current level for January’s meeting. This assumes that the jobs market doesn’t show more signs of slowing.
There is a trade-off between inflation and jobs currently. All else equal, inflation might signal a need for incrementally higher interest rates, but risks to the jobs market might imply a need for further interest rate cuts.
Of course, the FOMC has to find a balance and maybe the current level of 3.5%-3.75% for the Federal Funds rate will still represent that for January’s meeting. Nonetheless, interest rates are still expected to move slightly lower over 2026 as a whole.