Interest Rates Stay Put: What the Fed Should Be Doing

By SBE Council at 29 January, 2026, 10:17 am

by Raymond J. Keating –

On January 28th, the Federal Open Market Committee (FOMC) surprised no one by leaving the federal funds rate at a range of 3.50 percent to 3.75 percent.

As for the Fed’s outlook on the economy, it was more positive than previous statements, saying that economic activity had grown at a “solid pace.” In his press conference, Fed Chairman Jerome Powell noted that fixed nonresidential investment had been strong and consumer spending resilient.

The FOMC also was a bit more tepid, again compared to recent statements, on its assessment on inflation, declaring that “Inflation remains somewhat elevated.” The Fed added that word “somewhat” in this statement.

But no one should be comfortable with inflation running at near 3 percent, including when compared to the Fed’s longtime inflation rate target of 2 percent. On an annual basis, the U.S. hasn’t seen the Fed hitting that 2 percent target (or being very close) since 2020, while inflation had previously been around or below that target since 2012.

Source: Federal Reserve Bank of St. Louis, FRED

Make no mistake, the Fed’s primary goal, and the only area of the economy where it actually can make a clear contribution (whether positive or negative), is price stability.

The problem with Fed policy (as seen in the chart above) is that it has contributed to inflation since 2020 and provided a foundation for inflation since unprecedented loose money took control in late 2008.  The Fed would do well to continue reining in the monetary base (the part of the money supply over which the Fed has direct control) that began in late 2021.

Much of the rest of the debate over the Fed is little more than noise, yet it’s noise that’s listened to by policymakers and market participants.

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council. He is the author of “The Weekly Economist” book series, and 10 Points from Walt Disney on Entrepreneurship.