Federal Reserve Chair Jerome Powell offered an upbeat report on the U.S. economy after the Fed’s first policymaking meeting of 2026.

“Essentially, the economy has once again surprised us with its strength,” Powell said.

But central bank officials left interest rates unchanged on the benchmark Federal Funds Rate, which influences short-term borrowing like interest rates on credit cards, auto financing and student loans.

And to the disappointment of Main Street and Wall Street, Powell declined to comment on future interest-rate cuts this year.

We’re not trying to articulate a test when to next cut or whether to cut at the next meeting,” he said. “What we’re saying is we’re well positioned as we make decisions meeting-by-meeting, looking at the incoming data, evolving outlook and all that.”

Federal Funds Effective Rate Chart.

Board of Governors of the Federal Reserve System

Divided FOMC votes to pause interest-rate cuts

The Federal Open Market Committee voted 10-2 to hold interest rates steady at 3.50% to 3.75% after three consecutive cuts of 25 percentage points in the last three meetings of 2025.

More Federal Reserve:

  • Fed faces 2026 upheaval as economy shifts, Powell exits

Fed Governors Stephen Miran and Christopher Waller dissented. It was the FOMC’s first pause since July 2025.

“The outlook for economic activity has improved, clearly improved since the last meeting, and that should matter for labor demand and for employment over time,” Powell said.

The Fed chief reiterated that the labor market has shown signs of stabilizing, but added, “I wouldn’t go too far with that,” noting there were also signs of continued cooling.

Market reacts to Fed interest-rate pause

Market reaction was very muted for a Fed decision day.  

  • After the S&P 500briefly reached 7,000 for the first time in the morning, the index closed flat on the day, as did the 10-year Treasury at 4.24%.
  • The DXY dollar index closed modestly higher, following declines over the prior several trading days.

How the Fed manages interest rates 

The Fed’s dual congressional mandate requires it to balance inflation and job growth via interest rates.

  • Lower interest rates support hiring but can fuel inflation.
  • Higher rates cool prices but can weaken the job market.

The two goals often conflict, operate on different timelines and are influenced by unpredictable global events. 

After the December rate cut, Powell said that the lowering of rates brought monetary policy “within a broad range of neutral.”

A neutral rate neither stimulates nor restrains economic growth.

When the Federal Reserve last paused interest rates

The Fed last paused interest rates in September 2023, holding the funds rate at 5.25% to 5.50% after a rapid tightening cycle aimed at curbing post-pandemic inflation.

The pause lasted nearly a year as policymakers wanted to see whether higher borrowing costs would tame inflation without tipping the economy into a recession.

During that pause, inflation gradually cooled and the labor market remained resilient.

The central bank resumed cutting rates in September 2025 once Fed officials became confident that inflation was moving sustainably toward the Fed’s 2% target.

Investors react to FOMC January vote

In a statement, the FOMC said economic activity has been expanding at a solid pace. 

“Job gains have remained low, and the unemployment rate has shown some signs of stabilization. Inflation remains somewhat elevated,’’ the statement said.

Brian Mulberry, Senior Client Portfolio Manager at Zacks Investment Management, said the FOMC statement did show some measurable changes even though policy rates remained steady.  

“Not runaway bullish sentiments but a clear acknowledgement that ‘Available indicators suggest that economic activity has been expanding at a solid pace,’” Mulberry said. “Remember that the December SEP showed GDP growth at a mere 2.0%, this seems like they may be updating that by the March meeting to a much more robust/realistic number.”

“Inflation remains above target and has shown recent signs in both headline and core PCE/CPIthat make the voting majority uncomfortable lowering rates, further progress is needed to continue the easing cycle,’’ Mulberry said.

The widely watched CME Group FedWatch Tool estimates the Fed’s next quarter-percentage point cut as:

  • March 18: 13.5%
  • April 29: 24.1%
  • June 17: 47.5%

Related: How long will the Fed pause interest-rate cuts after January FOMC?

Jeffrey Hibbeler, Director of Portfolio Management at Exencial Wealth Advisors, said there “ was no updated guidance regarding balance sheet policy, and purchases of short-term Treasury securities will continue in order to maintain an ample reserve supply, as previously announced in December.”

Although Powell feels a good part of policy normalization is done and the funds rate is around a neutral level, cooling inflation could eventually allow its rate to be lowered, Hibbeler said.

“Inflation is expected to cool as tariff effects end; however, if employment improves with growth, that will likely keep service inflation sticky. Taken together, a shift in policy will likely fall to the next Fed chair, whose term begins at the June meeting,’’ Hibbeler said.

Powell defends interest-rate pause

At a press conference following the announcement, Powell said that the labor market seems more stable and that most of the tariff impacts on goods inflation should work their way through prices by the middle quarters of 2026.

Bloomberg Economics’ Anna Wong said “We called the peak of tariff pass-through at last October and Powell seems to agree with us.”  

  • He described the economy as “stronger” and “growing,” adding that it appears to be on “the higher end’’ of neutral.
  • Tension between strong growth and the soft labor market has been resolved somewhat, Powell said.
  • Upside risk to inflation and downside risk to employment both appear to have diminished since the December meeting, Powell said.

 “If demand and supply are in balance, you could say that is full employment,’’ Powell said. “But at the same time, do we really feel like that is a maximum employment economy? You know, it is a very challenging and quite unusual situation.”

Why the White House demands lower interest rates

President Donald Trump has spent the past year blasting Powell and the FOMC for not lowering rates to around 1% or lower.

The White House maintains this will stimulate the stagnant housing market and reduce the amount of interest on the nation’s debt which currently hovers between approximately $38.4 trillion to $38.5 trillion. 

Is the White House trying to influence monetary policy?

This week’s meeting comes after dramatic episodes Fed watchers say were instigated by the White House to influence lower rates and compromise the central bank’s independence.

  • The Supreme Court heard arguments Jan. 21 in Fed Governor Lisa Cook’s bid to stop Trump’s attempt to fire her for cause on allegations of mortgage fraud.
  • Powell announced Jan. 11 the Department of Justice issued subpoenas related to a criminal investigation into cost overruns of renovations at the Fed’s headquarters.
  • Trump has said he will soon announce his nominee to replace Powell as chair in May, a candidate that the president has insisted will follow his lead on monetary policy.

Powell offers bold advice to his successor

Despite dogged attempts by reporters to elicit a reaction on the political drama, Powell declined to comment on most questions except to offer the following words of advice to the next Federal Reserve chair:

“Stay out of elected politics. Don’t do it.”

Powell also expressed confidence that the Fed’s independence will be ensured in the future. 

Related: Why small firms are glued to a Fed meeting missing a rate cut