Fed to adopt wait and see approach on interest rates

Andrew Harrer/Bloomberg

• Key Insight: Fed Chair Jerome Powell has signaled that the central bank's rate-setting committee will be more withdrawn in its monetary policy decisions going forward, preferring to wait to see how the economic picture develops.
• Expert Quote: "Having reduced our policy rate by 75bps since September and 175bps since last September, the fed funds rate is now within a broad range of estimates of its neutral value, and we are well positioned to wait to see how the economy evolves," — Fed Chair Jerome Powell. 
• What's at stake: A wait-and-see approach clashes with the Trump administration's view that the central bank should cut rates more aggressively to bolster consumer spending.

The Federal Reserve's rate-setting committee does not appear to be in a rush to cut short-term rates going into 2026.

Speaking at a press conference following the Federal Open Market Committee meeting Wednesday, Fed Chair Jerome Powell suggested the central bank will hold steady on interest rates, saying the committee is "well positioned to wait to see how the economy evolves."

At year's end, the FOMC cut short-term interest rates by a total of 75 basis points, moving the policy rate most recently to a range of 3.5% to 3.75% amid concerns about a weakening labor market. On Wednesday, the committee overwhelmingly voted to cut rates by 25 basis points, despite growing fissures among policymakers.

When asked at the press conference whether the Fed is "on hold" in 2026 until it gets more clarity, Powell answered, "Yes."

"The adjustments since September bring our policy within a broad range of estimates of neutral, and as we noted in our statement today, we are well-positioned to determine the extent and timing of additional adjustments based on the incoming data, the evolving outlook and the balance of risks," Powell said. "That new language points out that we will carefully evaluate that incoming data, and also I would note that, having reduced our policy rate by 75bps since September and 175bps since last September, the fed funds rate is now within a broad range of estimates of its neutral value, and we are well positioned to wait to see how the economy evolves."

By waiting to see how three consecutive cuts affect the overall economy, the Fed will be able to determine which part of its dual mandate requires more attention.

The approach runs counter to the desires of President Donald Trump, who throughout 2025 has used various tactics to try to influence the trajectory of the central bank's monetary policy. These tactics included pressuring Powell to resign and attempting to fire Fed Gov. Lisa Cook over alleged mortgage fraud, a claim yet to be proven.

For now, both sides of the mandate show signs of imbalance.

Some key inflation and labor market data have been delayed or only partially released because of a 43-day government shutdown this fall, but available indicators show inflation hovering near 3% and labor market data pointing to continued softening.

ADP recently reported that employers lost 32,000 jobs in September. The report also revised August's figures down sharply, from 54,000 jobs added to a net loss of 3,000.

The December FOMC meeting saw a heightened number of dissents, with three officials voting against the quarter-point reduction. Fed Gov. Stephen Miran favored a 50-basis-point cut, while Kansas City Fed President Jeffrey Schmid and Chicago Fed President Austan Goolsbee wanted rates left unchanged.

The unusually high number of dissenting votes is notable but not unexpected, as some members of the FOMC have expressed ongoing concerns about inflation. The last time three officials opposed a rate cut was in 2019. Despite the fractures among committee members, Powell commented that discussions around monetary policy among FOMC members are 'thoughtful and respectful."

"Everyone around the table at the FOMC agrees that inflation is too high and we want it to come down, and agrees that the labor market has softened and that there's further risk," Powell said. "Where the difference is how you weigh those risks." Gregory Daco, chief economist at EY-Parthenon, said in a note he expects policy deliberations to "become even more divided next year." 

"Our view remains that the Fed will hold policy steady in January, with only 50bp of cuts in 2026—most likely in March and June," Daco said in a written statement. "These moves hinge on further cooling in labor market momentum and core PCE settling near 3% in early 2026. Market pricing is likely to remain volatile ahead of the combined October–November employment report on December 16 and the combined CPI release on December 18."

Powell, in one of the last press conferences he is likely to give as chair, commented that he is not actively thinking about his legacy, and noted that he is prioritizing transitioning out of his chairmanship with the economy in "really good shape."

"My thought is that I really want to turn this job over to whoever replaces me with the economy in really good shape," Powell said Wednesday. "That's what I want to do. I want inflation to be under control, coming back down to 2%, and I want the labor market to be strong."

Several contenders are being vetted to lead the central bank, including White House National Economic Council Director Kevin Hassett, Fed Gov. Christopher Waller and Fed Vice Chair for Supervision Michelle Bowman.

Powell's term as chair ends May 25, 2026, but his term on the Fed board doesn't end until Jan. 31, 2028. It is uncertain whether the current Fed chair will stay at the central bank after his term as chair expires in five months.