Economic Data Suggests Interest Rate Cuts Aren’t Imminent

Recent economic data has suggested that the need for interest rate cuts may be a little less pressing. As such, fixed income markets project that the the Federal Open Market Committee may not cut interest rates again until June or maybe July.

Improving January Jobs Data

The jobs report for January as released on February 11 was more positive than expected. It showed a 130,000 increase in nonfarm payrolls. That’s the strongest month of job creation since 2024. In part, that reflects how soft 2025 was for job growth, but if January’s trend is sustained, some officials see less need for interest rate cuts in the near term.

Federal Reserve Governor Christopher Waller, who has recently voted for interest rate cuts, said in a speech on February 23rd of the jobs data that, “One month of good news does not constitute a trend, but a year does, and the year of 2025 was an extraordinarily weak one for job creation—the weakest outside of a recession since 2002. We will not know whether the upturn in this initial estimate of job creation is signal or noise until we get more data. Fortunately, before the next meeting of the FOMC on March 17 and 18, we will get employment and inflation data for February, as well as more data on job openings and retail sales. If these data support the idea of an improvement in the labor market in January that continued in February, along with additional progress toward 2 percent inflation, that could result in my outlook turning a bit more positive and my view of appropriate monetary policy may tilt toward a pause at our upcoming meeting.”

As a member of the FOMC who recently dissented in calling for interest rate cuts, if Waller sees reason to hold rates steady, then that suggests a majority of the FOMC would likely be happy to wait before potential further cuts, too.

Inflation Moderating

Inflation was also relatively positive for January as reported in the Consumer Price Index. The trend is harder to fully discern because of missing data for October due to the government shutdown, but inflation appears to be decelerating after some acceleration in spring 2025, likely related to tariffs.

That said, inflation is running at a annualized 2.4% rate which remains a little above the FOMC’s 2% target.

Implications for Policy

Perhaps the strongest case for cutting interest rates in recent months was that the jobs market was weakening and the FOMC might want to get ahead of that potential trend with supportive lower interest rates.

However, if, as January’s jobs data potentially implies, the jobs market is holding up better than expected, then maybe there is less need for interest rate cuts, especially with inflation still slightly above target.

Upcoming FOMC Meetings

Markets currently expect the FOMC to hold interest rates steady at the next meeting on March 18.

Kevin Warsh has been nominated as the next Fed Chair to replace Jerome Powell. If approved, Warsh may bring changes to how the FOMC communicates. However, for now markets are not implying a major shift in monetary policy under Warsh with rates still seen moving gradually lower in 2026, but with only two or three cuts expected, perhaps weighted to the second half of the year. For now, cuts in March or April are seen as less likely.

The first cut of 2026 may not occur until the summer and recent economic data appears to support that decision, though upcoming jobs data will be closely watched. The next jobs report is scheduled for March 6.