The Federal Reserve has had a tough time lately. Sticky inflation and rising unemployment, driven by layoffs and less hiring, boxed it into a corner until September last year, prompting fierce pushback from the White House and likely costing Fed Chair Jerome Powell his job when his term as Chairman expires on May 15, 2026.

Still, the Fed cut interest rates three times by year’s end, prompting hope among would-be borrowers that the trend would continue at the first Federal Open Market Committee (FOMC) meeting on January 28. Unfortunately for households and businesses, the odds of a cut this week have dwindled to nearly zero, shifting Wall Street‘s forecasts to meetings later this year.

Fast Fact: The Federal Reserve has lowered interest rates by 1.75% since September 2024.

CFRA Chief StrategistSam Stovall, for example, doesn’t think the Fed will cut rates until June. That’s cold comfort for homebuyers hoping that lower rates could reduce mortgages, closing the unaffordability gap that widened over the past two years.

Federal Reserve Chairman Jerome Powell is expected to leave the Fed Funds Rate unchanged on January 28.

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Fed’s stuck between rock & hard place

Federal Reserve Chair Powell stayed on the sidelines for most of 2025 because of fears that rate cuts would fan inflationary flames, even as newly imposed tariffs pushed consumer and wholesale prices higher.

Importers, including retail giants Walmart and Amazon, faced intense pricing pressure due to tariffs, raising the effective tariff rate to 16.9% from 2.4% in January 2025, according to Yale Budget Lab. The spike in import taxes has increased costs by nearly $30 billion per month, including $28.5 billion in December alone, based on U.S. government tax receipts.

Related: Fed rate cut odds shift as FOMC blackout begins

Companies have absorbed some costs and negotiated fiercely with suppliers, but prices on retail store shelves have still risen, and, according to Amazon, will continue to rise in 2026.

Little wonder, then, that the Consumer Price Index, or CPI, shows inflation has bumped up to 2.7% from 2.3% in April 2023. That’s problematic for the Fed, especially since unemployment has climbed to 4.4% from 4%.

The Fed makes interest rate decisions based on a dual mandate:

  • Low inflation
  • Low unemployment

Unfortunately, those two goals contradict each other. Higher rates slow inflation but cause unemployment, while lower rates have the opposite effect.

The net result has been a hamstrung Fed, forced to walk a monetary policy tightrope, over fear that being too hawkish or dovish could cause unintended consequences that derail the economy into stagflation or, worse, a recession.

Interest rate cut bets get pushed deeper into 2026

Sam Stovall has been navigating stocks and economic head and tailwinds for decades. He’s seen plenty of good and bad times over his career and witnessed many Fed meetings under former Chairs Alan Greenspan, Ben Bernanke, Janet Yellen, and current Chair Powell.

Fast fact: There have only been 16 Senate-confirmed Chairs of the Federal Reserve Board of Governors since the position was created in 1914.

Stovall isn’t convinced Powell will rush to cut rates this year, despite intense pressure from President Donald Trump’s administration, including legal threats.

More Federal Reserve:

  • Cooling jobs report resets Fed interest-rate cut bet
  • Fed faces 2026 upheaval as economy shifts, Powell exits
  • Fed official forecasts bold path for interest rates, GDP in 2026
  • Fed cuts rates as dissents loom at key December meeting

“The Federal Open Market Committee (FOMC) will pass on cutting rates at its January 27-28 meeting,” wrote Stovall in a client note shared with TheStreet. “CFRA thinks the FOMC will wait until June to cut rates again.”

The CME FedWatch tool indicates we won’t get a rate cut on Wednesday, when the Fed announces its decision. The tool, which rates the probability of interest rate changes based on the Futures market, currently puts the likelihood of a rate cut in January below 3%.

If so, hopes for rate relief shift to the following meetings on March 18, April 29, or, as Stovall suggests, to the meeting after that on June 17.

CME FedWatch rate cut odds (March, April, June):

  • March 18: 15.5%
  • April 29: 25.5%
  • June 17: 45.9%
    Source: CME FedWatch tool.

What does it mean for loans, markets?

The Fed doesn’t set bank lending rates directly, but it does influence them. Its rate changes affect the Federal Funds Rate (FFR), the rate at which banks lend reserves to each other overnight. Treasury bond yields, which banks use to set bank lending rates on many loans, tend to move in concert with the FFR, so mortgage rates and other lending rates similarly move in the same direction as the Fed.

A Fed “on pause” suggests limited relief in the form of lower auto, credit card, business, and mortgage loan rates; however, rates can also be impacted by other factors. For instance, mortgage rates fell after President Trump instructed Fannie Mae to use its buying power to buy mortgage-backed securities in the open market, reducing yields.

While households and businesses would prefer cheaper rates to lower interest expenses and provide more financial flexibility, a Fed on pause doesn’t necessarily spell doom for the economy or stocks.

GDP is expected to grow 5.4% in Q4, according to the Atlanta Fed’s GDPNow tool, and Goldman Sachs predicts GDP will average 2.6% in 2026. That growth should continue to support corporate profits. FactSet data shows Wall Street is modeling for S&P 500 earnings growth of 14.7%, up from 12.4% in calendar 2025.

As a result, most of Wall Street is forecasting another year of S&P 500 gains. However, that doesn’t mean that any stock gains will happen in a straight line. It’s common to see 10% corrections, and the second year of the four-year Presidential Election cycle is notorious for sell-offs, losing an average of 17%, according to Carson Group.

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