FOMC January 2026: Fed Holds Rates in Split Decision

The Federal Reserve concluded its January 27-28 FOMC meeting by maintaining the federal funds target range at 3.50-3.75%, marking the first pause after three consecutive 25 basis point cuts in September, November, and December 2025. The decision featured a 10-2 split, with Governors Stephen Miran and Christopher Waller dissenting in favor of a quarter-point reduction—a notable division that suggests the Committee remains divided on the appropriate pace of normalization.

Chair Powell's press conference struck a more hawkish tone than markets anticipated. The statement language upgraded economic activity from expanding at a "moderate pace" to a "solid pace"—a subtle but meaningful shift that reinforced the case for patience. Powell's key remarks shaped fixed income sentiment throughout the week:

Credit Spreads Near Historic Tights

Credit markets continued to display resilience despite the week's political uncertainty. High yield spreads tightened 5 basis points to 234 basis points, remaining at just the 2nd percentile of their 5-year range—an extreme reading that reflects either strong fundamental conviction or potential complacency. Investment grade spreads widened modestly by 2 basis points to 71 basis points, still positioned at the 8th percentile. Primary issuance continued at a brisk pace, with January 2026 marking one of the busiest starts to a year on record for investment-grade corporate bond sales.

Federal Reserve Policy Outlook

Market pricing consolidated around 1-2 rate cuts for full-year 2026 following the FOMC's patient messaging, with the first reduction not expected until June at the earliest. Fed funds futures show virtually no probability of action at the March 17-18 meeting. The two dissents in favor of a cut—from Miran and Waller—indicate the Committee is not uniformly hawkish, but Powell's characterization of policy as potentially "not significantly restrictive" pushed back against expectations for near-term easing. (For context on how the Fed arrived at current policy settings, see our FOMC October 2025 analysis.)

The Warsh nomination introduces a new variable. While Senate confirmation remains uncertain—with Senator Thom Tillis reiterating opposition until the Justice Department's investigation into Powell is resolved—markets must now price potential policy shifts under new leadership starting in May. Warsh's historical criticism that the Fed has been too slow to normalize during expansions, combined with recent comments suggesting the Fed may have been too slow to cut, creates ambiguity about his actual policy direction.

Week Ahead: Employment Data Takes Center Stage

• Nonfarm Payrolls (February 7): January employment report will be closely watched for signs of labor market cooling. Any weakness could shift March FOMC pricing toward greater probability of a cut.
• ISM Services PMI (February 5): January services sector activity gauge provides key read on the dominant component of US economic output amid consumer confidence weakness.
• Warsh Confirmation Dynamics: Senate Banking Committee movement on the Fed Chair nomination could influence Treasury markets, particularly at the long end where term premium concerns remain elevated.
• Fed Speakers: Multiple FOMC participants scheduled to speak, potentially offering clarity on the Committee's reaction function and thresholds for additional cuts.
• Treasury Auctions: Refunding week continues with 10-year and 30-year auctions testing demand at elevated yield levels.

US Economic Positioning and Global Context

The US economy enters February with conflicting signals that complicate the fixed income outlook. The Fed's pause and Powell's relatively hawkish messaging contrast with two dovish dissents and looming leadership change. Credit markets remain constructive, with spreads at historical extremes and primary issuance robust. Yet consumer confidence at decade lows and delayed economic data create unusual uncertainty about underlying fundamentals. For historical context on how similar data divergences have resolved, explore our full archive of market insights.

For duration positioning, the bull steepening pattern suggests markets are pricing eventual Fed cuts while demanding higher term premium for long-end exposure given fiscal and leadership uncertainty. The 30-year yield at the 93rd percentile represents meaningful cheapness on a historical basis, but persistent supply concerns and Warsh nomination uncertainty may sustain elevated yields. Credit's extreme tightness offers limited cushion for any fundamental deterioration, making security selection and credit quality paramount.