The Federal Reserve held interest rates steady at 3.50% to 3.75% during its January 28, 2026, policy meeting, shifting its focus to incoming economic reports to determine the timing of future moves. This pause follows three consecutive rate cuts in late 2025 and comes as the central bank balances a softening labor market against inflation that remains above its 2% target. Policymakers are now closely monitoring specific inflation and employment data points to see if the current “neutral” stance is appropriate for the months ahead.
Why These Reports Matter to the Fed
The Federal Reserve operates under a “dual mandate” assigned by Congress: maintaining stable prices and promoting maximum sustainable employment. Between formal meetings, the Federal Open Market Committee (FOMC) uses monthly reports to gauge if the economy is overheating or cooling too quickly.
Recent data carries extra weight as the Fed attempts to achieve a “soft landing.” With inflation at 2.7% in December and unemployment stabilizing at 4.4%, officials have stated they are “data-dependent,” meaning they will not commit to further cuts or hikes until these reports show a clear trend.
Inflation Reports the Fed Is Watching
The Fed monitors two primary inflation gauges, each providing a different perspective on price stability.
- Consumer Price Index (CPI): Released by the Bureau of Labor Statistics, the CPI tracks the change in prices paid by consumers for a basket of goods and services. The Fed looks at “Headline CPI” for the broad picture, but focuses more on “Core CPI,” which strips out volatile food and energy costs to reveal underlying trends.
- Personal Consumption Expenditures (PCE): This is the Fed’s preferred inflation metric. The PCE is broader than the CPI and accounts for “substitution behavior”—when consumers switch to cheaper alternatives as prices rise. Core PCE is the specific figure the Fed targets for its 2% goal.
Jobs Reports That Shape Policy
The health of the labor market tells the Fed if the economy can support higher interest rates or if it needs more stimulus through rate cuts.
- Nonfarm Payrolls: This monthly report shows how many jobs the economy added or lost. In December 2025, the U.S. added 50,000 jobs, a significant slowdown from previous years, signaling a “cooling” labor market.
- Unemployment Rate: The unemployment rate stood at 4.4% in December. While low by historical standards, any sharp rise toward 5.0% would likely pressure the Fed to cut rates to prevent a recession.
- Wage Growth: The Fed watches average hourly earnings closely. If wages rise too fast, it can lead to “wage-push inflation,” where companies raise prices to cover higher labor costs.
Recent Signals From the Data
Latest reports indicate a mixed economic environment. Inflation showed “sticky” behavior in late 2025, partly due to the impact of new tariffs on goods. While services inflation has eased, goods prices have seen a one-time bump.
On the employment side, job growth has slowed due to lower labor force participation and reduced immigration. However, Chair Jerome Powell noted on January 28 that the labor market appears to be “stabilizing” rather than collapsing, which supported the decision to pause rate cuts.
How the Fed Interprets Mixed Data
The Fed faces a challenge when reports conflict—for example, if inflation stays high while job growth disappears. In such cases, the Fed often chooses a “wait and see” approach.
The committee is currently balancing the risk of cutting rates too early, which could reignite inflation, against the risk of keeping rates too high for too long, which could cause unnecessary job losses.
What Would Change the Fed’s View?
The Fed’s current pause could end if the data shifts significantly in either direction:
- Inflation Surprise: If January or February CPI reports show inflation moving back toward 3.5%, the Fed may hold rates steady for the entire year.
- Labor Market Shock: A sudden jump in the unemployment rate above 4.6% or a negative nonfarm payrolls print would likely force an immediate rate cut in March.
Market Reaction to These Reports
Financial markets typically see high volatility on “Data Days.”
- CPI Release: If inflation is higher than expected, bond yields usually rise and stocks fall as investors prepare for higher interest rates.
- Jobs Report: A “weak” jobs report (fewer jobs added) often leads to a stock market rally because it increases the probability of a Fed rate cut.
What to Watch Next
Investors and analysts are looking toward the next set of critical data releases that will inform the March 17-18, 2026, FOMC meeting:
- February 6, 2026 (08:30 AM ET): January Employment Situation (Jobs Report)
- February 11, 2026 (08:30 AM ET): January Consumer Price Index (CPI)
- February 27, 2026 (08:30 AM ET): January Personal Consumption Expenditures (PCE)
Final Takeaway
The Federal Reserve has moved away from the predictable rate cuts seen in late 2025. Policy is now strictly “data-dependent.” Until the inflation and jobs reports provide a unified signal, the central bank is expected to maintain its current interest rate levels. Patience remains the official stance as the Fed waits for more evidence that the economy is moving toward its 2% inflation and maximum employment goals.
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