Fed Holds Rates at 3.5%–3.75% as Dissents, Trump Pressure Test Central Bank Independence

The Federal Reserve left its benchmark interest rate unchanged Wednesday, holding the federal funds target range at 3.5% to 3.75% in a split decision that underscored uncertainty about the economy and mounting political pressure on the central bank.

In a 10–2 vote at the end of its Jan. 27–28 policy meeting, the Federal Open Market Committee paused after three straight quarter-point cuts late last year. Two governors, Stephen Miran and Christopher Waller, dissented, saying they preferred another 0.25 percentage point reduction.

“Economic activity has been expanding at a solid pace,” the committee said in its statement. “Job gains have remained low, and the unemployment rate has shown some signs of stabilization. Inflation remains somewhat elevated.”

The move would ordinarily be seen as a routine step in a long campaign to bring prices under control after the pandemic-era surge. Instead, it unfolded amid an unusual combination of factors: a “jobless boom” in which output is strong but employment is flat, an open push from President Donald Trump for faster rate cuts, and parallel legal efforts that could redefine the Federal Reserve’s independence.

Powell: A cautious pause in an easing cycle

At a news conference in Washington, Chair Jerome Powell cast the decision as a cautious pause in an easing cycle that has already reduced borrowing costs by 1.75 percentage points since late 2024.

“The U.S. economy expanded at a solid pace last year and is coming into 2026 on a firm footing,” Powell said in prepared remarks. “Inflation is significantly below its peak but remains somewhat elevated. We are squarely focused on our dual mandate of maximum employment and stable prices.”

Powell noted that since September the Fed has cut rates by three-quarters of a percentage point and now sees policy “within a range of plausible estimates of neutral” — a level that neither stimulates nor restrains growth. He emphasized that the committee is “not on a preset course,” saying decisions will be made “meeting by meeting” as officials assess new data and risks.

No new Summary of Economic Projections was released with the January decision. The most recent projections, published in December, show policymakers expecting growth to slow from last year’s pace, unemployment to hover in the mid-4% range and inflation to gradually recede to the Fed’s 2% target by 2028. The median forecast implies only very gradual further rate cuts over the next two years.

Inflation cools, but not to target

The economic picture heading into the meeting was mixed. Consumer prices have cooled sharply from their 2022 peaks, but have not yet returned to the Fed’s goal. Headline inflation, as measured by the consumer price index, rose 2.7% in December from a year earlier, with core prices excluding food and energy up 2.6%.

Powell said the Fed’s preferred gauge, the personal consumption expenditures price index, was running at about 2.9% for overall inflation and 3.0% for core.

A softer labor market alongside strong growth

At the same time, the labor market has softened. The unemployment rate stood at 4.4% in December, up from around 4.1% to 4.2% a year earlier. Powell said total nonfarm payrolls had declined by an average of 22,000 jobs over the prior three months, with modest gains in private employment offset by losses in government jobs. Job openings, layoffs and wage growth have shown little change in recent months, suggesting slower demand for workers but no broad collapse.

By contrast, overall output has remained robust. Government data show the economy grew at an annualized rate of about 4.3% to 4.4% in the third quarter of 2025, the fastest in two years, led by consumer spending and business investment in technology and artificial intelligence. Early estimates point to similarly strong growth in the fourth quarter, despite a 43-day partial shutdown of the federal government that is expected to weigh temporarily on activity.

Those crosscurrents — sturdy growth, a cooling but still tight job market, and inflation still near 3% — helped persuade most Fed officials to pause and reassess after a string of cuts.

Two dissents add to the political crossfire

Miran and Waller, both appointed by Trump, argued for moving faster. Miran has consistently called for more aggressive easing, including favoring a half-point cut at the December meeting. Waller, previously known as one of the committee’s more hawkish members during the tightening phase, joined Miran in pressing for another reduction in January.

Dissenting votes on monetary policy are not unusual, but splits at turning points in the policy cycle tend to draw attention because the Fed often tries to project unity when it changes direction. The two “no” votes also give the White House an opening to claim that even some Fed insiders believe rates are too high.

Trump has repeatedly attacked Powell for not cutting rates more quickly, publicly urging the Fed to “sharply” lower borrowing costs to help deliver economic growth of 4% to 5% and boost markets ahead of the 2026 midterm elections. Those attacks have come alongside more formal efforts that critics view as attempts to bring the central bank to heel.

Legal battles deepen scrutiny of Fed independence

In November, federal prosecutors in Washington opened a criminal investigation into whether Powell misled Congress about the cost and scope of a multibillion-dollar renovation of the Fed’s headquarters on Constitution Avenue. The renovation, now estimated around $2.5 billion, has faced delays and overruns. The probe, approved by U.S. Attorney Jeanine Pirro, is examining whether Powell understated the project when he testified.

As of late January, no charges have been filed. The Justice Department has declined to comment on the case. Powell has said he stands by his testimony and has privately told associates he views the investigation as politically motivated, according to people familiar with the matter.

Separately, Trump last year sought to remove Governor Lisa Cook, a Biden appointee, accusing her of mortgage fraud before she joined the Fed. Cook has denied the allegation and has not been charged with any crime. She sued to keep her position, arguing that the Federal Reserve Act allows removal of governors only “for cause” related to conduct in office and that the administration violated her right to due process.

In September, U.S. District Judge Jia Cobb in Washington issued a preliminary injunction blocking Cook’s ouster, finding she was likely to prevail on her claim that pre-appointment conduct did not qualify as “for cause” and that she had been denied adequate notice and an opportunity to respond. The U.S. Court of Appeals for the D.C. Circuit later declined to grant an emergency stay, allowing Cook to continue serving and to vote in FOMC meetings.

The Supreme Court heard arguments in the case, Trump v. Cook, on Jan. 21. Several justices, including Chief Justice John Roberts and Justices Amy Coney Barrett, Brett Kavanaugh and Ketanji Brown Jackson, questioned the breadth of the president’s asserted removal power and warned that granting it could “weaken, if not shatter, the independence of the Federal Reserve,” according to a recording of the session.

Cook participated in the January meeting and joined the majority in voting to hold rates steady.

The confluence of a criminal probe into a sitting chair and a Supreme Court case over the removal of a sitting governor is unprecedented in the Fed’s modern history, according to legal scholars and former officials. A September survey of Wall Street economists by CNBC found that more than 80% believed the president’s actions amounted to an attempt to limit or eliminate the central bank’s independence, and most expected such efforts to lead over time to higher inflation, weaker growth and a weaker dollar.

Markets steady; borrowers still feel high costs

Financial markets took Wednesday’s decision largely in stride. U.S. stock indexes were mixed to slightly higher in afternoon trading. Treasury yields moved modestly, with some flattening of the yield curve as traders nudged back expectations for the pace of future cuts. The dollar strengthened slightly against major currencies.

For households and businesses, the immediate effect is that borrowing costs will stay where they are for now. Mortgage and auto loan rates have fallen from their peaks as the Fed reversed part of its earlier tightening, but remain well above levels seen for most of the 2010s. Credit card and small-business lending rates are still high enough to pinch borrowers, while savers benefit from higher yields on deposits and money-market funds even as inflation continues to erode purchasing power.

Powell closed his remarks by returning to a theme that has taken on new urgency as legal and political fights swirl around the institution he leads.

“We will continue to make our decisions with objectivity, integrity, and a deep commitment to serve the American people,” he said. “That means following the data and our mandate, wherever they lead.”

How long the Fed can do that without further interference may depend less on the next batch of inflation and jobs numbers than on rulings from the courts and choices in the White House — factors that now loom almost as large over U.S. monetary policy as the economic data themselves.