From grocery stores to healthcare facilities and automotive plants, rising prices and affordability are top of mind for millions of Americans right now.

Some of them are Federal Reserve officials whose jobs actually require them to keep inflation in check for the rest of us.

Several Fed regional presidents said Jan. 15 that ongoing inflation pressures are prompting them to pause interest-rate cuts, explaining that a cooling labor market appears to be stabilizing.

“The most important thing facing us is we’ve got to get inflation back to 2%,” Chicago Fed President Austan Goolsbee told CNBC, adding that concerns from businesses across his district over rising costs and affordability prompted his opinion.

Federal Funds Effective Rate Chart.

Board of Governors of the Federal Reserve System

Inflation, jobs fuel interest-rate decisions

Maximum employment and price stability are the twin priorities — the dual mandate from Congress — of the Federal Reserve.

These goals require a delicate balance:

  • Higher interest rates lower inflation but increase job losses.
  • Lower interest rates lower unemployment but increase inflation.

The current benchmark Federal Funds Rate is 3.50% to 3.75%. 

The Federal Open Market Committee, the central bank’s policymaking panel, cut the funds rate three times for a total of 75 basis points in 2025.

After the December rate cut Fed Chair Jerome Powell said that the lowering of rates brought monetary policy “within a broad range of neutral.”

How the neutral rate impacts the economy

Neutral means the Federal Reserve’s benchmark interest rate neither stimulates nor restrains economic growth.

Economists define the neutral rate, or r-star (r*), as the interest rate that keeps the economy at full employment while maintaining stable inflation around the Fed’s 2% target.

  • It’s important to note that the neutral rate isn’t a fixed rate.
  • The neutral rate fluctuates according to productivity growth, demographic trends and global capital flows.

Most Fed officials currently estimate that the long-run neutral rate falls between 2.5% and 3% but roughly 4.5% to 5% when accounting for inflation.

Here are 2026 Fed interest-rate cut forecasts

The next FOMC meeting is Jan. 27-28. CME Group’s widely watched FedWatch Tool estimates a 5% chance of a quarter-percentage point cut.

Looking ahead to 2026, the Fed’s own median projection or “dot plot” suggested there would be only one additional 25 basis points cut. 

This would move the rate to around 3.25% to 3.50% by year’s end.

Related: Jamie Dimon Warns of Global Crisis Over Fed Probe

Traders are slightly more dovish, penciling in two or three rate cuts, but not until June or later. That’s when Powell’s replacement as chair is expected to be installed.

President Donald Trump has spent the past year blasting Powell and the FOMC for not lowering rates to around 1%.

The White House maintains this will stimulate the stagnant housing market and reduce the amount of interest on the nation’s debt which currently hovers between approximately $38.4 trillion to $38.5 trillion. 

Impact on inflation, jobs and economic growth

Understanding neutral helps policymakers at the independent central bank determine whether current monetary policy is restrictive or accommodative. 

If the Federal Funds Rate exceeds the neutral rate then borrowing becomes more expensive. As inflation cools, it potentially slows economic growth.

Below neutral, cheaper credit encourages spending and investment but potentially slows growth.

Fed officials address inflation concerns

Goolsbee and the other presidents of Fed regional banks signaled the central bank is well-positioned to wait for more data on inflation and employment before taking action on interest rates.

Goolsbee said he had put aside previous concerns about the labor market, saying uncertainty had prompted businesses to slow hiring but not to make large-scale layoffs.

Goolsbee dissented against the rate cut at the Fed’s last meeting in December, along with his counterpart in Kansas City, Jeff Schmid.

Bloomberg reported Schmid reiterated his case against more cuts, arguing some cooling in the labor market “is likely necessary to keep the inflation outlook from worsening.”

Fed officials pivot on rate-cut bet

Two Fed officials who supported the recent rate cuts also backed a pause in January. 

  • San Francisco Fed President Mary Daly said in a LinkedIn post that “policy is in a good place.” 
  • Philadelphia Fed President Anna Paulson told the Wall Street Journal she was comfortable with holding rates steady this month.

Their comments follow reports over the last week showing:

The December unemployment rate ticked down to 4.4%.

The Consumer Price Index suggested inflation may still be close to 3%, a full percentage point above its target.

Related: Investors focus on Fed independence as chair decision looms