Federal Reserve set to hold interest rates amid solid growth, persistent inflation
- The US Federal Reserve is expected to leave the policy rate unchanged after the first meeting of 2026.
- Fed Chair Powell’s comments on the policy outlook will be watched closely by investors.
- The US Dollar struggles to stay resilient against its rivals following a bullish start to the year.
The United States (US) Federal Reserve (Fed) announces its interest rate decision on Wednesday. Markets widely expect the US central bank to keep the policy rate unchanged in the range of 3.5%-3.75%. As this decision is nearly fully priced in, Fed Chair Jerome Powell’s comments in the post-meeting press conference could impact the US Dollar’s (USD) performance.
The CME FedWatch Tool shows that investors see about a 98% probability of a policy hold in January, and price in a 15% chance of a 25-basis-point (bps) rate cut in March.
According to a recently conducted Reuters poll, all 100 economists surveyed expect the Fed to hold the federal funds rate unchanged in January. Moreover, 58% of respondents forecast no rate changes during the first quarter, compared with December’s poll, when at least one cut by March was anticipated.
TD Securities analysts agree that the Fed will keep rates on hold at the 3.50%-3.75% range, arguing that risk-management cuts are now over and the policy is closer to neutral.
"While Powell is likely to sound noncommittal around near term rate cuts, we expect him to remind market participants that the median Fed official still looks for easing this year," they add. "Overall, we expect a relatively neutral reaction from the FOMC meeting. While we continue to look for rates to move lower later this year amid a combination of less prohibitive supply dynamics, strong demand, and further Fed rate cuts, the risk in the near-term is a Fed on hold for longer."
When will the Fed announce its interest rate decision and how could it affect EUR/USD?
The Fed is scheduled to announce its interest rate decision and publish the monetary policy statement at 19:00 GMT. This will be followed by Fed Chair Jerome Powell's press conference starting at 19:30 GMT.
The rate decision itself is unlikely to trigger a significant market reaction, but Powell’s tone could influence the USD valuation and drive EUR/USD price action.
In case Powell adopts an optimistic tone on the inflation outlook and emphasizes the need to support the labor market amid worsening conditions, investors could see this as a dovish sign. In this scenario, the USD could come under renewed selling pressure and allow EUR/USD to gather bullish momentum. Conversely, the pair could turn south if Powell notes that the central bank is not as concerned about the labor market as it was at the end of 2025 and that there are still upside risks to inflation. Investors could remain convinced of another monetary policy hold in March as a result, and the market positioning suggests that there is some room for USD gains.
Market participants will also pay close attention to headlines over the nomination of the next Fed chair. US President Donald Trump could take the opportunity to criticize Powell and announce his nomination just before or after the Fed event, ramping up the market volatility and clouding the market reaction.
US Treasury Secretary Scott Bessent said recently that Trump could reach a decision by the end of the month. The US president also told CNBC that he would prefer to keep White House economic adviser Kevin Hassett in his current position.
BlackRock's chief bond investment manager, Rick Rieder, Fed Governor Christopher Waller and former Fed Governor Kevin Warsh are the last three candidates in the race. Powell’s term as head of the Fed ends in May, but his term on the central bank runs through 2028. During the press conference, he is likely to be asked whether he intends to finish out his term. If Powell hints that his retirement will be sooner rather than later, and Trump names either Waller or Warsh as the next Fed chair, markets could lean toward a more dovish policy outlook, hurting the USD and boosting EUR/USD.
On the other hand, Rieder is widely seen as someone who would be less influenced by politics and who would assess economic conditions to make the right policy decisions. Although that doesn’t necessarily mean he wouldn’t embrace a dovish stance, he is a market person after all, and his nomination could at least ease market concerns over the Fed losing its independence.
In a post published on X in response to the inflation data, “we think the Fed is likely to become increasingly concerned about genuine labor market weakness and will respond with modest reductions in the policy interest rate,” said Rieder and added:
“However, given the noisiness of recent data, including this report, the Fed will probably choose to wait a meeting, or so, to begin cutting rates again. 2026 is likely to bring much greater dispersion across monetary policy paths, economic growth trends, and credit markets.”
Eren Sengezer, European Session Lead Analyst at FXStreet, provides a short-term technical outlook for EUR/USD:
“The Relative Strength Index (RSI) indicator keeps near overbought conditions on the daily chart, and EUR/USD holds firm above its 20-day and 100-day Simple Moving Averages (SMA), highlighting a bullish tilt in the short-term technical outlook. On the upside, 1.1918 (September high) aligns as the immediate resistance level ahead of 1.2000 (round level). On the flip side, 1.1821 (Friday’s close) could be seen as the first support level before 1.1760 (static level), followed by 1.1710 (20-day SMA). A daily close below the latter could open the door for a steeper slide toward the 1.1600 mark.”
Central banks FAQs
Central Banks have a key mandate which is making sure that there is price stability in a country or region. Economies are constantly facing inflation or deflation when prices for certain goods and services are fluctuating. Constant rising prices for the same goods means inflation, constant lowered prices for the same goods means deflation. It is the task of the central bank to keep the demand in line by tweaking its policy rate. For the biggest central banks like the US Federal Reserve (Fed), the European Central Bank (ECB) or the Bank of England (BoE), the mandate is to keep inflation close to 2%.
A central bank has one important tool at its disposal to get inflation higher or lower, and that is by tweaking its benchmark policy rate, commonly known as interest rate. On pre-communicated moments, the central bank will issue a statement with its policy rate and provide additional reasoning on why it is either remaining or changing (cutting or hiking) it. Local banks will adjust their savings and lending rates accordingly, which in turn will make it either harder or easier for people to earn on their savings or for companies to take out loans and make investments in their businesses. When the central bank hikes interest rates substantially, this is called monetary tightening. When it is cutting its benchmark rate, it is called monetary easing.
A central bank is often politically independent. Members of the central bank policy board are passing through a series of panels and hearings before being appointed to a policy board seat. Each member in that board often has a certain conviction on how the central bank should control inflation and the subsequent monetary policy. Members that want a very loose monetary policy, with low rates and cheap lending, to boost the economy substantially while being content to see inflation slightly above 2%, are called ‘doves’. Members that rather want to see higher rates to reward savings and want to keep a lit on inflation at all time are called ‘hawks’ and will not rest until inflation is at or just below 2%.
Normally, there is a chairman or president who leads each meeting, needs to create a consensus between the hawks or doves and has his or her final say when it would come down to a vote split to avoid a 50-50 tie on whether the current policy should be adjusted. The chairman will deliver speeches which often can be followed live, where the current monetary stance and outlook is being communicated. A central bank will try to push forward its monetary policy without triggering violent swings in rates, equities, or its currency. All members of the central bank will channel their stance toward the markets in advance of a policy meeting event. A few days before a policy meeting takes place until the new policy has been communicated, members are forbidden to talk publicly. This is called the blackout period.
Economic Indicator
Fed Monetary Policy Statement
Following the Federal Reserve's (Fed) rate decision, the Federal Open Market Committee (FOMC) releases its statement regarding monetary policy. The statement may influence the volatility of the US Dollar (USD) and determine a short-term positive or negative trend. A hawkish view is considered bullish for USD, whereas a dovish view is considered negative or bearish.
Read more.Next release: Wed Jan 28, 2026 19:00
Frequency: Irregular
Consensus: -
Previous: -
Source: Federal Reserve
Author
FXStreet Team
FXStreet
