Key Takeaways
- The FOMC held the fed funds rate at 3.50%–3.75% for a second straight meeting as policymakers weigh slowing growth, persistent inflation, with core PCE at 3.1%, and geopolitical uncertainty from the Middle East
- Despite the recent surge in oil prices, the Fed is likely to look through energy-driven inflation volatility, suggesting policy will remain patient rather than pivoting back to rate hikes after last year’s cumulative 75 basis points of cuts from September to December
- With policy rates already near the Fed’s estimated “neutral” level around 3.5%, investors should prepare for an environment where additional easing may be limited, reinforcing the case for strategies emphasizing income and duration management in fixed income portfolios
For the second consecutive policy gathering, the Federal Open Market Committee (FOMC) decided to remain ‘on hold,’ keeping the fed funds trading range at 3.50%–3.75%. For the most part, this result was largely expected by markets. Unfortunately for the Fed, policymakers are in the challenging position of juggling incoming economic and inflation data as well as uncertainties emanating from the Middle East war.
Against this backdrop, both the Fed and the broader investment community are left wondering what could come next from a monetary policy standpoint. One point to address upfront is that despite the surge in energy prices, the Fed will not be entertaining any potential rate increases. Rather, the voting members remain in a data-dependent mode that should continue to argue for a more patient approach to the decision-making process. This point is underscored by the fact that the FOMC cut the fed funds rate by 75 basis points from September through December of last year. In other words, it is not as if the Fed is ‘behind the curve’ at this point.
With geopolitical events creating an uncertain setting, it is important to look at how the economy and inflation were behaving prior to the Middle East war. According to Q4 2025 real GDP data, the broader economy slowed to end last year, with growth at 0.7%. However, the federal government shutdown likely weighed on activity and should not be a restraining force in 2026. In fact, a ‘true’ measure of underlying demand, real final sales to private domestic purchasers, rose by just under 2% in Q4, underscoring how personal consumption and investment remain positive forces for overall growth.
