January 2026
Considerable drama surrounds the Federal Reserve (Fed) entering 2026, but little of it concerns the first policy-setting meeting of the year.
- We think that the Federal Open Market Committee (FOMC) will likely keep the federal funds target rate at 3.50% to 3.75% at its January 27 to 28 meeting and signal no hurry to change it thereafter.
- The meaningful drama comes from the selection of the next chair by the White House and the ruling on Fed Governor Cook’s dismissal by the Supreme Court. These are outside influences on Fed officials, who, like us, must watch and wait.
- During this watchful waiting, Chair Powell is likely to stay on the sidelines to give his colleagues scope to publicly debate the appropriate policy stance. This serves two purposes. The higher volume of Fed talk reminds the political class that monetary policy is a group decision, and Chair Powell is preparing his colleagues for their potential future role in the “loyal opposition” if the administration’s choice of the next chair is viewed as problematic by markets.
In a close, contested call in September, the FOMC settled on buying insurance for economic expansion by signaling the intent to cut the policy rate by one quarter percentage point at each of its last three meetings of 2025. While aggregate demand remained on a vigorous track, supported by financial accommodation, fiscal impetus, and an artificial-intelligence-related splurge on capital, employment growth was tepid. This mixed performance raised the risk that the labor market may be less resilient to adverse shocks and impair economic expansion. While inflation remained above the Fed’s goal of 2%, tariff pressures were more contained than feared. Ultimately, Fed officials were willing to tolerate a slower return of inflation to its goal in exchange for additional support to employment.
The decision was contested because policymakers had differing views on support for aggregate demand, the resilience of the labor market, and the remaining effects of tariffs on headline inflation. Recent events mostly supported the Fed’s purchase of insurance—although the full cost of the premium may depend on the outcome for inflation in 2026. For now, they seem willing to wait for the results of what they have put in place. As noted in the minutes of the December meeting, “with respect to the extent and timing of additional adjustments to the target range for the federal funds rate, some participants suggested, under their economic outlook, it would likely be appropriate to keep the target rate unchanged for some time after a lowering of the range at this meeting.”1 We interpret “some” to imply that a large enough portion of the group serves as a blocking coalition to put off action for at least the next few meetings.
Their assessment also might be colored by the political economy. Change is coming to the composition of the FOMC. The substitutions, at least one with the new chair and another possible depending on the judicial process, will put more weight on easing. The sitting members probably feel no need to front-run that eventuality.
In current circumstances, a quarter-point here or there on the target rate seems inconsequential for the Fed’s call in 2026. After the orderly advisory process in which Treasury Secretary Bessent winnowed a lengthy list of candidates, the decision rests in the Oval Office. No one has an edge in predicting the president, including us.
But we can count to put the decision in perspective.
Since the creation of the position in the Banking Act of 1935, there have been 10 chairs of the Fed, as shown in the table. Among the highlights:
- All 10 had prior experience in the executive branch of government before being tapped for the Fed. Those roles included advising the president, working in the Treasury, and heading the Council of Economic Advisers.
- On first appointment, 8 of the 10 were in the same political party as the president. And the two exceptions were early on, when Democratic presidents had trouble finding a business leader who was not a Republican.
This shows that the Fed chair is a political appointment. The first time any of them entered the Oval Office was not for their job interview. They had been there before and, given the party alignment, they probably were not uncomfortable there either.
A quick further run of the numbers concerning their experience in areas relevant to the job shows:
- 6 of 10 had experience within the Federal Reserve System; the most recent four had the most established credentials. Paul Volcker, Ben Bernanke, Janet Yellen, and Jay Powell had been on the FOMC before they were asked to lead it.
- 5 of 10 had academic training in economics.
- 5 of 10 worked in banking or finance in some private-sector capacity.
In thinking about the next four years with a new chair, the precedent is that the person is known in political circles, thought to be loyal, and probably will not tick all the boxes about what will be expected of them. On-the-job training may follow: for them on what to do, and for us on what to expect.
Vincent Reinhart
Chief Economist & Macro Strategist
Vincent is the firm’s Chief Economist and Macro Strategist. In this role, he is responsible for developing views on the global economy and making relative value recommendations across global bond markets, currencies and sectors.
Previously, Vincent served as the Chief US Economist and a managing director at Morgan Stanley. For the prior four years, he was a resident scholar at the American Enterprise Institute (AEI). Vincent also spent 24 years at the Federal Reserve, holding several roles including Director of the Division of Monetary Affairs and Secretary and Economist of the Federal Open Market Committee (FOMC). His responsibilities at the Federal Reserve included directing research and analysis of monetary policy strategies and the conduct of policy through open market operations, discount window lending and reserve requirements. Prior to these roles, he was the principal liaison with the domestic desk at the Federal Reserve Bank of New York and was responsible for preparing a document outlining policy alternatives for each FOMC meeting. He was Deputy Director in the Division of International Finance and Associate Economist of the FOMC and spent five years at the Federal Reserve Bank of New York in both the domestic and international research departments.
His academic publications primarily concern the conduct of policy and issues related to the monetary transmission mechanism as well as an analysis of alternative auction techniques and Treasury debt management. After an undergraduate training at Fordham University, he received graduate degrees in economics at Columbia University.
Endnotes
1. Source: Board of Governors of the Federal Reserve System, “Minutes of the Federal Open Market Committee,” December 9–10, 2025.
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