MFS: Comments ahead of Fed interest rate decision

January 28, 2026

Interest Rates Fed

Erik Weisman, Chief Economist at MFS Investment Management, comments on the Fed's upcoming interest rate decision.

The guidance from the Fed is that the policy rate is now in the neutral “range” and appropriate for the two-sided risks to the dual mandate that many participants foresee. FOMC members want to observe concrete progress on inflation before they cut interest rates further. This will take time and argues for a backloading to any further cutting cycle.

The labor market is weak, but it is not plunging. The optimists argue that Okun’s law will finally prevail and resilient GDP growth will ultimately lead to a pick-up in hiring. Even if an improvement in job gains does not come to pass, questions will remain around the effect of immigration curbs on labor market tightness. The final arbiter of this debate will be the pace of wage inflation. Clear answers to these questions are unlikely to emerge anytime soon.

Inflation is easing but it is a very slow process. The goldilocks argument is that the tariff passthrough is in the rearview mirror. Consequently, easing goods inflation combined with slowing wages and rents will enable monthly core PCE prints to flirt with the Fed’s 2% target by the end of 2026.

Pessimists contend that weaker than expected core goods inflation so far reflects heavy imports in anticipation of “Liberation Day” and sales of pre-tariff inventory. Per this view, stronger core goods inflation is just around the corner. Again, it will take time to get clarity on this issue as well.

Another argument for back-ended rate cuts is that GDP growth has surprised on the upside and financial conditions remain easy. There is no cost to waiting for the outlook fog to clear.

The White House also appears to be responding to market feedback by underplaying Hasset’s candidacy. The policy manifestation of this dynamic may be a Fed even more wary of frontloaded cuts.