In its January meeting, the Federal Reserve kept the Fed Funds Target Range at 3.50%–3.75%, meeting market expectations. The decision passed with a 10–2 vote, as some governors preferred a rate cut. The Committee noted that inflation remains slightly elevated yet no longer sees downside risks to employment rising.
Economic Conditions
Chair Powell stated the US economy is on firm footing, with current policies promoting employment and inflation objectives. While housing activity is weak, effects from the government shutdown should reverse soon. Powell suggested that although the labour market may be stabilising, job growth has slowed, and the market has softened.
On inflation, Powell noted it remains slightly above the Fed’s goal. Core PCE inflation was estimated at 3% in December. Most inflation overshoot is attributed to goods prices linked to tariffs. Policy rates are within neutral estimates, and Powell emphasised flexibility in future adjustments. He suggested that inflation expectations are stabilising, with lessened risks on both sides of the mandate.
Interest rates, influenced by central banks, affect loan costs and savings returns. Higher rates strengthen a national currency, making it an attractive investment. Higher rates can decrease gold prices due to increased opportunity costs. The Fed funds rate influences overnight bank lending rates in the US.
With the Federal Reserve holding rates steady, the immediate risk of a hawkish surprise is gone, but the door is now clearly open for cuts later this year. The dissent from two members wanting a cut is a strong signal that the internal debate is shifting towards easing. We should position for a market that is no longer pricing in hikes, but is instead trying to time the first cut.
The trigger for a rate cut will be the labor market, just as Chair Powell indicated. Looking back, the final Non-Farm Payrolls report for 2025 came in at a softer-than-expected 155,000, continuing the cooling trend from the 200,000+ prints seen earlier that year. Any further weakness in upcoming jobs data will likely cause interest rate futures to price in a cut sooner, perhaps moving from the June meeting into the May meeting.
Market Implications
Powell’s focus on core inflation without tariff effects suggests the Fed is willing to look through the headline numbers. The most recent Consumer Price Index (CPI) report for December 2025 showed headline inflation easing to 3.1%, supporting this view that underlying pressures are contained. This perspective is bearish for the U.S. Dollar, as other central banks may not be as quick to signal future cuts.
For equity markets, this policy stance removes a major headwind and reduces tail risk. With rate hikes off the table and the economy described as “solid,” implied volatility in index options should remain low or trend lower. This environment is favorable for strategies that benefit from stable or rising stock prices, such as selling out-of-the-money put options.
This situation feels similar to the pivot we experienced back in 2019, when the Fed paused its hiking cycle before beginning to cut rates mid-year as the economy showed signs of slowing. That period was bullish for non-interest-bearing assets like gold. Given the prospect of future rate cuts and a weaker dollar, traders could consider building long positions in gold derivatives.
