FOMC Minutes, Feb. 2026: Hold, Split Vote, Two-Sided Risks

Key takeaways (what mattered most)

• Rates held at 3.50%–3.75%, with two dissents favoring a 25 bp cut.
• The inflation path is expected to improve, but progress may be “slower and more uneven”, with officials emphasizing the risk of persistence above 2%.
• Tariffs were a central theme: officials largely attributed core goods inflation to tariff effects, while core services (especially housing) continued to disinflate.
• A notable shift in tone: several participants wanted a “two-sided” description of future rate decisions, explicitly preserving the possibility of hikes if inflation stays above target.
• Financial conditions remained supportive: equities up modestly, credit spreads low, and market pricing still pointed to 1–2 cuts this year.
• Implementation and plumbing mattered: ongoing reserve management purchases (RMPs) and a focus on maintaining ample reserves, with continued use and redesign/communication around standing repo operations.

1) The decision: hold steady, but not unanimous

The Committee maintained the target range for the federal funds rate at 3.50%–3.75%, while two members preferred a 25 bp cut. The official statement retained a data-dependent posture: future adjustments will depend on incoming data, the evolving outlook, and the balance of risks.

What’s important is the why: most participants saw policy as already near estimates of neutral after 75 bps of cuts last year, while the dissenters judged policy still meaningfully restrictive and were more concerned about downside labor-market risks.

2) The staff baseline: solid growth, stable labor, inflation still above target

Growth and activity. Staff said real GDP continued to expand in 2025, albeit slightly slower than 2024. They also estimated the government shutdown likely reduced Q4 GDP growth by about 1 percentage point, and that trade dynamics reflected earlier tariff front-loading (imports fell and the goods deficit narrowed).

Labor market. The unemployment rate was 4.4% in December. Payrolls turned negative on average in Q4 due to a sharp drop in government employment tied to the end of a deferred resignation program; however, November–December gains resembled Q3’s pace. Wage growth (average hourly earnings) ran 3.8% y/y.

Inflation. Staff described inflation as somewhat elevated: PCE inflation 2.8% (Nov) and core PCE 2.8% (Nov). They also flagged core goods pressures tied largely to tariffs and noted data collection issues linked to the shutdown likely pushed down the CPI and PCE levels in November–December.

Staff forecast and risk skew. The staff outlook was stronger than December, with GDP expected to outpace potential through 2028 as tariff drag wanes and fiscal/financial conditions support spending. Uncertainty remained elevated (geopolitics, policy changes, AI effects, and data-quality issues), with risks to growth/employment skewed down and inflation risks skewed up.

3) Inflation: tariffs in goods, disinflation in housing services, but persistence risk stays “meaningful”

Participants largely agreed the inflation backdrop has improved since 2022 yet remains above the 2% objective. The key decomposition in these minutes:

• Core goods inflation: repeatedly linked to tariff pass-through.
• Core services (especially housing): many saw continued disinflation, adding downside pressure to overall inflation.
• Productivity/AI channel: several participants saw higher productivity—potentially supported by automation/AI and other developments—as a disinflationary force that could reduce firms’ need to raise prices.
• But: most cautioned progress toward 2% could be slower/uneven and judged the risk of inflation staying persistently above target as meaningful, including via demand pressure and business intentions to raise prices (tariff-related costs among the drivers).

4) Labor & growth: “low hiring” stabilization, but a fragile configuration

On labor, the minutes emphasize a stabilizing but low-dynamics setup: layoffs are low, but hiring is low too—raising the risk that a further drop in labor demand could translate into a sharper rise in unemployment in a low-hiring environment. Some also noted concentration of job gains in less-cyclical sectors as a potential vulnerability signal.

On growth, participants described:

• Resilient consumer spending, supported by household wealth, but with a noted split between strong higher-income demand and softer lower-income demand.
• Robust business investment, especially in tech and AI-related areas, with productivity gains viewed by several as supportive of growth.

5) Financial conditions & market plumbing: supportive risk appetite, stable funding markets, and a balance sheet focus

Markets and rates pricing

Staff noted that market-implied policy paths and yields were little changed over the intermeeting period, equities rose modestly, and credit spreads stayed low. The Desk survey/market pricing still implied one to two cuts this year (median path: two 25 bp cuts).

Treasury, FX, and money markets

The minutes highlight operational and microstructure details:

• Treasury market functioning was described as well-functioning amid low volatility, with attention on repo-market stability given increased repo financing of Treasuries.
• Money markets were stable; year-end pressures were subdued, aided by liquidity (including RMPs), a smaller TGA, changes to standing repo operations, and better preparedness.
• The dollar depreciated against most currencies; there was discussion of “rate checks” in USD/JPY that were clarified as requests on behalf of the U.S. Treasury in the New York Fed’s fiscal agent role.

Balance sheet implementation (important, even if “technical”)

The implementation note confirms the operational stance:

• Maintain the corridor framework (IORB 3.65%, primary credit 3.75%).
• Continue standing repo and reverse repo operations.
• Increase SOMA holdings via Treasury bill purchases (and, if needed, other Treasuries ≤3 years) to maintain ample reserves; roll over Treasury principal; reinvest agency principal into T-bills.

Separately, the minutes describe an expected reserve path affected by TGA tax flows, with reserves projected to fluctuate near $3 trillion over most of the projection window.

6) Financial stability: valuations, private credit, hedge fund leverage, and “AI concentration” risks

Both staff and participants flagged vulnerabilities:

• Asset valuation pressures elevated (equity P/E high), partly reflecting optimistic earnings expectations for tech and strong risk appetite.
• Leverage vulnerabilities notable at hedge funds and life insurers, with mention of relative-value trades potentially increasing Treasury market fragility.
• Private credit and opaque financing channels tied to AI infrastructure buildout warranted monitoring, including interconnections with insurers and banks.
• Staff noted stablecoin market cap growth, though still small relative to other short-term funding instruments.

7) The most market-relevant nuance: “two-sided” reaction function is back in the room

A key tell from these minutes is communications/risk management: several participants said they would have supported language that more explicitly reflected two-sided future rate decisions—i.e., not just “cuts if inflation falls,” but also that upward adjustments could be appropriate if inflation remains above target.

At the same time, several warned that additional easing while inflation is still elevated could be misread as weakened commitment to 2%, risking more entrenched inflation.

8) What this means into the next meeting

The next meeting is scheduled for March 17–18, 2026.

From these minutes, the conditional map looks like:

• What would justify cuts: clearer evidence that disinflation is “firmly back on track,” particularly as tariff effects fade and core services/housing continue to cool.
• What could keep them on hold: steady growth + stabilizing labor + inflation not improving cleanly (especially if core goods/tariff pass-through persists or demand remains strong).
• What raises the tail risk of hikes: a scenario where inflation remains above target or re-accelerates, prompting broader acceptance of “two-sided” tightening risk

Source: Minutes of the FOMC (Jan 27–28, 2026), FOMC statement, and implementation note on Federal Reserve website. (federalreserve.gov)