Cleveland Fed President Beth Hammack said the US unemployment rate appears to be stabilising after the strong January Nonfarm Payrolls report. She said the labour market seems to be moving toward a healthy balance. Hammack said consumer spending is holding up and is being driven by higher-income households. She repeated that the Federal Reserve aims to bring inflation back to its 2% target.

Policy Appears Near Neutral

She said the current federal funds rate is “right around neutral,” meaning it is not strongly slowing the economy. She said it makes sense for the Fed to keep rates unchanged and that there is no need to fine-tune policy right now. Hammack also said US government debt is on an unsustainable path and needs to be addressed. The Federal Reserve has a dual mandate—price stability and maximum employment—and it mainly uses interest rates to reach these goals. The Fed holds eight policy meetings each year through the Federal Open Market Committee, which includes 12 officials. Quantitative easing increases credit and usually weakens the US Dollar, while quantitative tightening reduces bond reinvestment and is usually supportive of the US Dollar. Because policy is viewed as near neutral, we should not expect interest rate changes in the near future. This points to a steadier period, with the Federal Reserve likely to stay on hold for the next several meetings. Markets reflect this: pricing in the CME FedWatch Tool shows more than a 95% probability that rates will remain unchanged at the March 2026 meeting. The data supports this patient approach. The labour market is finding a healthier balance, while inflation remains stubborn. With the January 2026 unemployment rate steady at 3.8%, there is no urgent need to cut rates to support jobs. However, the latest Consumer Price Index reading of 2.9% is still too far from the 2% target to justify easing policy.

Market Focus Shifts Beyond The Fed

From our perspective in early 2026, this is a major shift from 2025. Last year was shaped by uncertainty about when the hiking cycle that began in 2022 would end. Volatility was high around every inflation report and every Fed meeting. The current “on hold” message suggests a calmer and more predictable policy path in the weeks ahead. This backdrop suggests implied volatility in interest rate options may fall further or stay low. Strategies that benefit from stable rates and time decay—such as selling straddles on Treasury futures—may become more attractive. The MOVE Index, which tracks Treasury market volatility, has already fallen to 85. That is well below the peaks above 130 seen during the banking stress of 2023. With the Fed on the sidelines, attention may shift to other data for signals on the economy’s direction. We will be watching consumer spending closely, especially after Hammack’s comments that higher-income households are supporting demand. Any weakness there—or any signs of credit stress tied to the government’s unsustainable debt path—could drive volatility even without Fed action. Create your live VT Markets account and start trading now.

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