After two weeks of political and legal scrutiny focused on the Federal Reserve, investors and economists are looking at the Fed’s meeting this week for a return to its usual interest-rate playbook. The central bank is scheduled to hold a two-day policy session that ends Wednesday, and it is widely expected to keep its key short-term rate unchanged at about 3.6% after the three quarter-point cuts it made last year.
Fed officials, including Chair Jerome Powell, have argued that they need to see what the economy does before adjusting policy again. Powell said after the December meeting that the Fed was “well positioned to wait to see how the economy evolves” before making further changes, a stance that suggests the baseline expectation is patience rather than an immediate new round of easing.
The meeting, however, is occurring against an unusual backdrop for an institution built on independence. Earlier this month, the Justice Department subpoenaed the Fed as part of a criminal investigation related to testimony Powell gave in June about a $2.5 billion building renovation, and the episode prompted a unusually public rebuke from Powell.
Powell has also sought to recast the disputes around the Fed as driven by economics rather than politics. He said Jan. 11 that the subpoenas were “pretexts” to punish the Fed for not cutting rates as sharply as President Donald Trump wants, and Claudia Sahm, a former Fed economist now chief economist at New Century Advisors, said that could translate into additional pressure on Powell to underscore that everything the Fed is doing is about economic conditions rather than political demands.
Sahm said the Fed will have to emphasize that it “didn’t think about the politics,” while Michael Gapen, chief U.S. economist at Morgan Stanley and a former Fed staffer, said that even with the heightened scrutiny, the Fed can be expected to conduct its meeting “like it always does.” Gapen described the meetings as having a “regular flow” that includes scheduled presentations and discussion, adding that the broader attacks on the Fed do not necessarily disrupt the central work of assessing policy options.
Even with a meeting focused on the policy rate, economists said the Fed’s next decision will likely depend on labor-market cooling signals and inflation progress. Other Fed officials have signaled that rates are likely to remain unchanged this week, and the prior round of cuts—three quarter-point moves—was intended to support the economy after hiring slowed sharply over the summer and fall following Trump’s April tariffs on dozens of countries.
Still, some indicators have suggested the labor market may be stabilizing rather than deteriorating. The number of people seeking unemployment benefits has stayed historically low, economists said, and the unemployment rate ticked lower in December after rising for much of the previous year. With the unemployment rate at 4.4% in FRED’s U-3 series at the article’s vintage, attention is likely to shift to whether unemployment drifts higher in the coming months.
At the same time, inflation has remained elevated and has not moved decisively toward target. The AP report said prices rose 2.8% in November from a year earlier, the latest data available at the time, compared with 2.6% in November 2024, as measured by the Fed’s preferred inflation measure. Unless businesses begin cutting jobs more quickly or unemployment rises, economists said the Fed is unlikely to cut again for at least a few months.
Markets are also looking for a limited pace of further reductions this year. Wall Street investors expected just two quarter-point rate reductions in 2026, based on futures prices, and some economists argued growth could pick up, which would provide another reason for the Fed to wait. Gapen estimated that tax refunds could be about 20% higher this spring than last year, and he said refunds could average $3,500.
The Fed’s rate decision this week may come down to what policymakers conclude about the next phase of economic activity. The economy expanded at a 4.4% annual rate in the July-September quarter and may have grown at a similarly healthy pace in the final three months of last year, according to the AP report, and if that momentum continues, Fed officials are expected to watch whether hiring improves enough to reduce the need for further cuts.