The economic expansion has advanced from the initial recovery, and the focus is now on metrics the Federal Reserve is looking at to gauge the health of the economy. Since the Fed’s dual mandate is to keep prices stable and maximize employment, we will focus on labor and inflation metrics, keeping in mind the broader economic impact as well. We created a Fed Monitor to track some of the data points that will impact the Fed’s decisions to tighten financial conditions. Additionally, we try to quantify the data and information outside of the dashboard to determine if the Fed is being more dovish than the data, and likely to be more aggressive in the future, or if they are being hawkish relative to the data, and likely to be more conservative in the future.
After three consecutive meetings of rate cuts, the Federal Reserve is likely to pause at its late‑January FOMC meeting. The futures market is pricing only a low single-digit chance of a surprise cut. Last year’s “insurance” cuts were aimed at stabilizing softer job growth, and the Fed now has the flexibility to take a wait‑and‑see approach over the coming months. Jerome Powell’s term as Fed Chair ends in May, leaving three meetings—January, March, and April—before his term concludes. A nomination for the next Fed Chair, which requires Senate approval, is expected soon, though a shift away from the Fed’s current dovish trajectory appears unlikely.
Recent economic data continues to show softer labor‑market momentum and inflation running above the Fed’s target. Over the final two months of 2025, employment grew by an average of 53,000 per month, while the unemployment rate edged down from 4.5% in November to 4.4% in December. Health Services remains the primary driver of job gains, whereas more cyclical sectors including manufacturing, construction, and professional and business services saw modest job losses in December. On a positive note, jobless claims remain low, signaling limited layoffs across the broader economy. Inflation data met expectations in December, with headline CPI rising 2.7% over the past year, and core CPI increasing 2.6%, though a few categories such as energy services (utilities) and food rose at a relatively high rate in December. While still above the Fed’s 2% target, price pressures have mostly stabilized.
Although an extended rate pause is not our base case, the Fed may refrain from cutting rates for the next few meetings. A further weakening in the labor market would likely alter the near‑term policy path, but for now, both inflation and employment trends appear steady. We are maintaining the Fed‑O‑Meter at its current position.
