FAU Economists: Fed to Remain Cautious on Rates

The Federal Reserve is currently holding the federal funds rate steady in a target range of 3.5% to 3.75%. This decision follows three consecutive quarter-point rate cuts in the latter part of 2025, which were aimed at bolstering a weaker labor market. The Fed's preferred inflation measure, the Personal Consumption Expenditures Price Index (PCEPI), grew at an annualized rate of 4.4% in December 2025. Core PCEPI, which excludes food and energy, was close behind at a 4.3% annualized rate for the same month. Both figures remain significantly above the central bank's long-term inflation target of 2%. A key factor complicating the Fed's decisions is the delay in economic data releases. A government shutdown last year disrupted the normal flow of information, and the Bureau of Economic Analysis does not anticipate being back on schedule until the end of April. This makes it more difficult for Federal Open Market Committee (FOMC) members to get a clear, real-time picture of the economy. The Federal Open Market Committee (FOMC) appears divided on the future path of interest rates. Minutes from the January 2026 meeting revealed that while some officials believe further rate cuts may be appropriate if inflation continues to decline, others argue for holding rates steady for a period. Several members even suggested that rate hikes could become necessary if inflation remains persistently high. "Policy shocks" are another source of uncertainty, a term that can refer to unforeseen events like geopolitical conflicts or significant changes in government fiscal policy, such as new tariffs. These shocks can impact economic growth and inflation, making it harder for the Fed to navigate. For example, the Supreme Court recently struck down the administration's global tariff policy, adding another layer of complexity. The term for the current Federal Reserve Chair, Jerome Powell, is set to conclude in May 2026, introducing a planned leadership transition into the policy-making environment. Recent statements from Fed officials reflect the divided outlook. Chicago Fed President Austan Goolsbee has suggested that several more rate cuts could be possible this year if inflation moves toward the 2% target. In contrast, Fed Governor Michael Barr has indicated it would likely be appropriate to hold rates steady for some time to assess incoming data. The next scheduled FOMC meetings, where decisions on interest rates will be made, are set for March 17-18 and April 28-29.