Jefferson Signals No Interest Rate Cut in January, Disinflation Process Continues to Slow

Vice Chair of the Federal Reserve Philip N. Jefferson on January 16, 2026, offered a cautious yet optimistic outlook on the U.S. economy at the start of the new year. In his speech at Florida Atlantic University, Jefferson emphasized that the Federal Reserve is not rushing to cut interest rates at the upcoming January meeting, as disinflation continues but faces significant hurdles. This signals clearly to markets that the monetary policy path will remain stable in the near term.

The Economy Remains Strong, But Disinflation Is Losing Momentum

U.S. economic performance in 2025 showed continued growth, albeit with some signs of weakening. Third-quarter 2025 GDP data indicated a 4.3% annual increase, well above the pace achieved in the first half of last year. This expansion was driven by strong consumer spending and a volatile surge in net exports. Business investment grew steadily, while the housing sector still struggles. Jefferson projects that, aside from government disruptions in the fourth quarter, the economy will continue to grow at around 2% in the near future—moderate and sustainable.

However, this achievement is accompanied by inflation challenges. The aggressive disinflation process seen in 2023-2024 has begun to slow. December 2025 CPI rose 2.7% year-over-year, and Core CPI (excluding food and energy prices) increased 2.6%—both still above the Federal Reserve’s 2% target. Historical charts show that although aggregate and core inflation have sharply declined from their mid-2022 peaks, the momentum of this decline has significantly slowed over the past year, indicating that reaching the final stages of disinflation may take longer than expected.

Detailed analysis reveals complex dynamics behind the aggregate data. Inflation in the housing services sector continues a steady downward trend, as do other non-energy services. However, this is offset by significant increases in core goods prices. After spiking during the pandemic and then returning to pre-pandemic levels in 2023, core goods inflation rose sharply in 2025, reaching 1.4% in December—disrupting the overall disinflation process. Jefferson attributes at least part of this rise to higher import tariffs, which have been passed on to consumers. While some price pressures persist, Jefferson maintains that tariff impacts are likely one-time effects in the economic cycle.

Labor Market Weakening, Rising Unemployment Risks

The labor market has shown progressive weakening throughout 2025. Job creation growth slowed substantially compared to the previous year, with employers adding about 50,000 non-farm jobs per month in November and December 2025. This is much lower than earlier periods and signals fundamental changes in labor market dynamics. The unemployment rate rose from 4.1% at the end of 2024 to 4.4% at the end of 2025, though this increase remains moderate.

Of particular concern to policymakers is that the main causes of this weakness are not only slower labor force growth due to immigration and declining participation rates but also weakening labor demand itself. The job openings-to-unemployment ratio fell to 0.9 in November 2025—still considered healthy but significantly lower than the very tight conditions during the post-pandemic recovery years. While layoffs remain low, indicating the market hasn’t experienced a sharp downturn, hiring activity remains subdued. In this context, the risk of deeper job losses appears to be increasing. Jefferson acknowledges that these dynamics have shifted the risk balance in monetary policy, supporting a more cautious approach to protecting the labor market.

No Rate Cut Decision: A Temporary Pause in Adjustment

In response to these risk dynamics, the Federal Reserve has made significant monetary policy adjustments. Since mid-2024, the FOMC has cut the federal funds rate by 1.75 percentage points—a move Jefferson considers appropriate to balance the risks of high inflation and a weakening labor market. These cuts have brought the policy rate into a range consistent with a neutral stance—neither stimulating nor restraining overall economic activity.

While not explicitly confirming a decision at the upcoming January 2026 meeting, Jefferson signals clearly that current policy positions leave room for the Fed to act based on incoming data and evolving outlooks. The key point is that there is no urgency to adjust interest rates further at the next meeting. This reflects an assessment that the current stance is adequate to address existing economic challenges, allowing flexibility to wait for more complete inflation data before deciding on the next move.

New Operational Mechanism: Reserve Management Purchases Not Quantitative Easing

Beyond discussions of interest rates, Jefferson highlighted that the Federal Reserve has taken important steps in balance sheet management through a new initiative starting December 2025. The process of reducing assets (quantitative tightening) initiated in mid-2022 has concluded, with total assets reduced by about $2.2 trillion. This reduction affected both sides of the balance sheet: not only securities holdings but also liabilities such as bank reserves and overnight reverse repo balances.

A crucial recent development is the initiation of Reserve Management Purchases (RMP) in December 2025. Jefferson clearly distinguishes RMP from traditional quantitative easing, a vital difference for markets to understand. Quantitative easing is a stimulus tool used when policy rates hit the effective lower bound, aiming to lower long-term interest rates and stimulate the economy through large-scale Treasury and mortgage-backed securities purchases. In contrast, RMP involves buying Treasury bills and short-term debt solely to maintain an adequate level of reserves in the banking system, ensuring effective control of short-term interest rates.

RMP is not a change in the stance of monetary policy. These purchases are technical and operational, designed to normalize the average duration of the Fed’s asset holdings while preserving the FOMC’s ability to control the federal funds rate precisely. The pace and scale of these purchases are adjusted according to the dynamic demand for reserves and changes in other balance sheet liabilities, reflecting seasonal fluctuations and structural factors in the financial system.

Stabilizing the Money Market: Standing Repo Operations as a Key Tool

As reserve levels decline from abundant to adequate, pressures are emerging in the money markets. The federal funds rate initially traded about 7 basis points below the interest on reserve balances (IORB) rate, but as reserves shrank, repo rates began rising and showed increased volatility. Particular stress was observed during tax payment days and government bond settlements, when large inflows into the Treasury General Account (TGA) drained reserves from the banking system.

To address this, the Fed eliminated the total cap on standing repo operations in December 2025. This instrument acts as a buffer to prevent excessive increases in repo rates. By the end of 2025, amid significant market pressures during large-scale Treasury settlements, usage of standing repo operations increased as expected. Although repo rates spiked at times, overall money market functioning remained orderly and controlled. Jefferson expressed satisfaction that this tool was utilized more when economic conditions truly required support.

Outlook and Commitment to the Dual Mandate

Overall, Jefferson maintains an optimistic yet cautious stance on economic prospects. While risks remain on both sides of the dual mandate—inflation and labor market—the Federal Reserve remains committed to closely monitoring incoming data. Disinflation has slowed, but Jefferson remains confident that inflation will return to the 2% target as short-term inflation expectations decline, assuming tariff impacts are one-time effects.

In this context, the decision not to cut rates in January 2026 does not signal a shift back to hawkish policy but reflects an assessment that the current stance is appropriate. The Fed is prepared to adjust if data indicate the need, but for now, the focus is on maintaining stability while continuing to watch inflation trends and labor market developments. This commitment, demonstrated through operational actions like RMP and expanded standing repo facilities, shows that the Fed is ready to ensure effective monetary transmission across the economy despite potential technical challenges in financial markets.