Broadly in line with market expectations, the Federal Reserve held its Policy Rate unchanged at 3.5–3.75%, effectively pausing the rate-cutting cycle that began in September 2025. Importantly, labor markets remain resilient, with the unemployment rate holding stable in recent months, and inflation is above the Fed’s long-run target.
The January 2026 Federal Open Market Committee (FOMC) meeting marked the first meeting with the new cohort of voters. The addition of relatively Hawkish voting members suggests that the first half of 2026 could be characterized by a firmer policy bias (i.e., a decreased likelihood of additional rate cuts) and a higher bar for further easing. As Chair of the Federal Reserve, Jerome Powell’s term is set to conclude in May 2026, the incumbent might introduce a more dovish policy framework, particularly if growth momentum softens.
For investors, this pause and the forward-path for rates continues to have implications on where to allocate across equities, fixed income, cash, and other asset classes.
Is Cash Still King?
In our view, cash remains attractive as a tactical allocation, particularly if policy stays restrictive in the near term. However, if you take the view that rate cuts are delayed rather than cancelled as political and policy uncertainty rises, cash’s relative appeal is likely to diminish over the medium term.
For allocators with this view, the solution may be move away from maintaining structurally elevated cash balances and instead gradually redeploying excess liquidity into assets with durable carry, convexity, or idiosyncratic return drivers. The ethos becomes “cash protects today; ultra-short positions prepare the portfolio for tomorrow”.
How are rate expectations shaping your views for 2026?
Source: Bloomberg, V-Square Quantitative Management LLC.
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