The Federal Reserve held rates steady at 3.5-3.75% on January 28, 2026, in a 10-2 vote that exposed a stunning reversal in internal divisions. Fed Governors Stephen Miran and Christopher Waller dissented in favor of a 25-basis-point cut—the first time two sitting governors have dissented together in decades. Just six weeks earlier in December, the vote split 9-3 the opposite direction: Miran wanted a 50 basis-point cut while Goolsbee and Schmid opposed any cut at all. The December minutes revealed even supporters called that decision "finely balanced." Now the battle lines have shifted entirely, with some hawks turning dovish while the 2026 FOMC voting rotation brought three new hawks—Cleveland's Beth Hammack, Dallas's Lorie Logan, and Minneapolis's Neel Kashkari—replacing Chicago's Goolsbee and Kansas City's Schmid. Miran's four-month term expired January 31, though he stated he will remain until Trump names a permanent replacement.
Two days after the January meeting, Trump officially nominated former Fed Governor Kevin Warsh to replace Powell as Fed Chair when his term expires in May 2026. But the nomination immediately hit a political firewall: Republican Senator Thom Tillis of North Carolina announced he will block any Fed nominee—including Warsh—until the Justice Department's criminal investigation of Powell is "fully and transparently resolved." Without Tillis's support on the Senate Banking Committee, Warsh likely cannot win confirmation, creating a stalemate that could leave the Fed leaderless when Powell's term ends. Meanwhile, U.S. Attorney Jeanine Pirro signaled no plans to drop the probe, which Powell calls retaliation for "setting interest rates based on our best assessment of what will serve the public, rather than following the preferences of the president." The question is no longer just whether the Fed conquers inflation—it's whether the institution survives as an independent central bank or becomes politically captured like central banks in Turkey and Argentina.
Two Fed governors (Miran, Waller) voted for rate cut—first dual-governor dissent in decades
3.0%
December 2025 core PCE inflation
Down from recent highs but still well above the Fed's 2% target
4.6%
Unemployment rate (Dec 2025)
Highest since September 2021, signaling labor market weakness
3.5-3.75%
Current fed funds rate (held Jan 2026)
Held steady after three consecutive cuts in late 2025
1
Projected 2026 rate cuts (Dec dot plot)
Down from 3-4 cuts expected just weeks earlier; wide disagreement persists
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Andrew Mellon
(1855-1937) ·Progressive Era · finance
Fictional AI pastiche — not real quote.
"A central bank that cannot withstand political pressure is merely a government bureau in disguise. The surest way to destroy sound money is to make its guardians fear for their positions—though I note Mr. Waller's vote suggests he grasps which master now controls his future. Independence purchased through statute is worthless without men willing to defend it."
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People Involved
Jerome Powell
Chair, Federal Reserve Board of Governors (Under DOJ criminal investigation while leading Fed through final months of term; defending central bank independence)
Stephen I. Miran
Federal Reserve Governor (Fed Board term expired January 31, 2026; stated he will remain until permanent replacement named)
Austan D. Goolsbee
President, Federal Reserve Bank of Chicago (Rotated off FOMC voting roster for 2026 after dissenting against December rate cut)
Jeffrey R. Schmid
President, Federal Reserve Bank of Kansas City (Rotated off FOMC voting roster for 2026 after dissenting against rate cuts)
Christopher J. Waller
Federal Reserve Governor (Dissenting in favor of rate cuts; rumored finalist for Fed Chair after Powell)
Beth M. Hammack
President, Federal Reserve Bank of Cleveland (New FOMC voting member in 2026, viewed as inflation hawk)
Lorie K. Logan
President, Federal Reserve Bank of Dallas (New FOMC voting member in 2026, viewed as strong inflation hawk)
Neel Kashkari
President, Federal Reserve Bank of Minneapolis (FOMC voting member in 2026, moderately hawkish)
Kevin Warsh
Former Federal Reserve Governor (2006-2011); Expected Fed Chair Nominee (Officially nominated by Trump on January 30, 2026; confirmation blocked by Republican Senator Tillis pending resolution of Powell DOJ probe)
Organizations Involved
BO
Board of Governors of the Federal Reserve System
Central bank
Status: Navigating deepest internal divisions in decades over rate policy
The central bank of the United States, responsible for monetary policy, financial stability, and banking supervision.
FE
Federal Open Market Committee
Monetary Policy Body
Status: Held rates steady 10-2 in January 2026 with unprecedented dual-governor dissent; more hawkish voting roster in 2026
The Fed's monetary policymaking body, consisting of 12 voting members who set interest rates.
Timeline
Trump to Announce Fed Chair Nominee
Political
Trump announced January 29 he will reveal his Fed Chair nominee on January 31. Former Fed Governor Kevin Warsh expected to be the pick, according to multiple reports.
Miran's Fed Board Term Expires
Leadership
Governor Stephen Miran's four-month term on the Fed Board expires. He stated he will remain until Trump names a permanent replacement.
U.S. Attorney Signals No Plans to Drop Powell Probe
Political
U.S. Attorney Jeanine Pirro states her office contacted the Federal Reserve "on multiple occasions" but "were ignored," signaling the criminal investigation will continue despite its impact on Warsh's confirmation prospects.
Trump Officially Nominates Kevin Warsh as Fed Chair
Political
Trump announces Warsh nomination via Truth Social, stating "I have known Kevin for a long period of time, and have no doubt that he will go down as one of the GREAT Fed Chairmen, maybe the best." If confirmed, Warsh would take office in May 2026.
Senator Tillis Vows to Block Warsh Confirmation
Political
Republican Senator Thom Tillis announces he will oppose confirmation of any Federal Reserve nominee, including Warsh, until the DOJ investigation of Powell is "fully and transparently resolved." Senate Majority Leader John Thune acknowledges Warsh could "probably not" win confirmation without Tillis.
Trump Announces Friday Reveal of Fed Chair Pick
Political
At the premiere for "Melania," Trump tells reporters he has "chosen a very good person to head the Fed" and will announce the nominee Friday morning.
Fed Holds Rates Steady in 10-2 Vote
Monetary Policy
FOMC holds rates at 3.5-3.75%. Governors Miran and Waller dissent, both preferring 25bp cut—first dual-governor dissent in decades.
Powell press conference states economy on "firm footing" and defends Fed independence, saying criminal probe is consequence of refusing to follow presidential preferences on rates.
Trump Escalates Attacks: "That Jerk Will Be Gone Soon"
Political
Trump intensifies criticism of Powell, calling him "that jerk" and predicting his departure when term ends in May 2026.
DOJ Opens Criminal Investigation of Powell
Political
Federal prosecutors open criminal investigation of Fed Chair Powell over June congressional testimony about Fed headquarters renovation. Powell calls it retaliation for rate policy independence.
FOMC Voting Rotation Brings Three Hawks
Leadership
Regional Fed presidents from Cleveland (Hammack), Dallas (Logan), and Minneapolis (Kashkari) gain votes; Chicago (Goolsbee) and Kansas City (Schmid) rotate off, shifting Committee more hawkish.
FOMC Minutes Released
Disclosure
Minutes from December 9-10 meeting expected to reveal internal debates over inflation risks versus growth concerns.
Minutes Reveal "Finely Balanced" Decision
Disclosure
Released FOMC minutes show even some who voted for the rate cut called it "finely balanced" and could have supported no change. Some participants stated rates should stay unchanged "for some time" going forward.
Three-Dissent Vote Exposes Deep Divisions
Monetary Policy
FOMC cuts 25bp to 3.5-3.75% in 9-3 vote. Miran wants 50bp cut; Goolsbee and Schmid want no cut. Powell calls it a "close call."
Dot Plot Slashes 2026 Cut Expectations
Projection
Fed officials project just one 2026 rate cut, down from three or four expected weeks earlier.
Second Rate Cut, First Dissent
Monetary Policy
Fed cuts another 25bp to 3.75-4%. Kansas City's Schmid dissents, preferring no change.
Fed Cuts Rates for First Time
Monetary Policy
FOMC cuts 25bp to 4-4.25% range, marking policy reversal after 14-month pause.
Stephen Miran Joins Fed Board
Leadership
Senate confirms Miran 48-47 along party lines; he also chairs Trump's Council of Economic Advisers.
Final Rate Hike to 22-Year High
Monetary Policy
Fed completes 11th hike, bringing rates to 5.25-5.5%, highest since 2001.
First 75-Basis-Point Hike
Monetary Policy
Fed delivers largest single increase since 1994 as inflation peaks at 9.1%.
Fed Begins Historic Rate Hiking Cycle
Monetary Policy
FOMC raises rates 25 basis points as PCE inflation hits 6.4%, marking first hike since 2018.
Scenarios
1
The 1970s Redux: Fed Pauses Too Soon, Inflation Explodes
Discussed by: Atlanta Fed President Raphael Bostic, inflation hawks on FOMC, financial press comparing current divisions to Arthur Burns era
The tariff shock proves larger than expected, driving core PCE back above 3.5% by mid-2026. The Fed's premature rate cuts—made before inflation was truly conquered—allow price expectations to drift upward. Powell's successor (term begins May 2026) faces the choice Burns failed: restart painful rate hikes or accept entrenched inflation. Markets revolt, long-term yields spike, and the Fed loses credibility. This is the nightmare keeping Goolsbee and Schmid up at night—the exact mistake that led to Volcker's brutal 1980s recession.
2
The Immaculate Soft Landing: Growth Survives, Inflation Dies
Tariff impacts prove transitory and don't bleed into wage expectations. Inflation drifts back toward 2% by late 2026 as productivity gains from AI offset cost pressures. The Fed completes two more cuts in 2026, bringing rates to 3%, and the economy avoids recession entirely. Unemployment stays below 4.5%, GDP growth holds at 2%, and Powell's cautious approach is vindicated. This would be the first time in postwar history the Fed tamed inflation without triggering a recession—a genuine policy triumph.
3
Policy Paralysis: Fed Freezes, Economy Stalls
Discussed by: Stephen Miran's dissents, economists warning Fed is "behind the curve," analysts tracking leadership transition risks
Internal divisions freeze the FOMC. With three members wanting faster cuts, three wanting none, and the rest uncertain, the Fed holds rates at 3.5-3.75% through all of 2026. But the economy needed lower rates—consumer spending craters, unemployment jumps to 5.5%, and the Fed faces criticism for strangling a recovery. Powell's May 2026 departure mid-crisis creates a leadership vacuum. The Fed eventually cuts aggressively in late 2026, but the damage is done: a shallow recession that could have been avoided.
4
Stagflation Trap: The Worst of Both Worlds
Discussed by: Fed research papers modeling stagflation probability, JPMorgan economists analyzing tariff passthrough, comparison to 1970s energy shocks
Tariffs act like 1970s oil shocks: they simultaneously boost inflation and crush growth. Core PCE stays above 3% while GDP growth drops to 1% and unemployment rises to 5%. The Fed faces an impossible choice—its dual mandate moves in opposite directions. Cut rates to help growth and risk embedding inflation, or hold tight and accept recession. Fed research showed stagflation probability near 30% in late 2022, dropped through 2024, then spiked again in mid-2025 on tariff fears. This scenario makes Powell's job unsolvable.
5
The Independence Crisis: Political Capture of the Fed
Discussed by: Every living former Fed chair (joint statement), Republican Senator Thom Tillis, financial press comparing to Turkish and Argentine central bank political interference
The DOJ investigation of Powell escalates, creating a chilling effect on Fed decision-making. Trump nominates a loyalist to replace Powell in May 2026—someone who dissented for cuts and signals willingness to follow White House preferences. The Senate confirms despite opposition from banking committee members. The new chair immediately pushes for aggressive rate cuts despite 3%+ inflation, destroying the Fed's inflation-fighting credibility. Long-term bond yields spike as markets price in permanently higher inflation risk. The dollar weakens. Foreign central banks begin diversifying away from Treasuries. This isn't just about one rate decision—it's about whether the U.S. joins the ranks of nations with politically-captured central banks that can't control inflation.
6
Confirmation Stalemate: Fed Enters May Without a Chair
Discussed by: Senate Banking Committee analysts, constitutional law experts tracking separation of powers issues
Tillis refuses to budge on blocking Warsh until the DOJ probe concludes. The investigation drags on through Powell's May 2026 term expiration. With no confirmed successor, the Fed operates under acting leadership during a critical inflation-fighting period. Markets react to the leadership vacuum with increased volatility. Congress faces pressure to intervene, but partisan divisions prevent resolution. This scenario would be unprecedented—no Fed Chair has left office without a confirmed successor since the 1951 Treasury-Fed Accord established central bank independence.
Historical Context
The Great Inflation and Arthur Burns' Fatal Pause (1965-1982)
1965-1982
What Happened
Fed Chair Arthur Burns hiked rates dramatically in 1972-74 as inflation surged, then reversed course and cut rates as recession hit. Inflation never fully died—it roared back worse. Burns repeated the stop-go pattern multiple times, never sustaining tightening long enough to break inflation psychology. By 1979, inflation hit double digits and Burns was out. Economists now view this as the Fed's greatest failure: declaring victory before inflation was vanquished.
Outcome
Short Term
Inflation persisted through the 1970s, spiking above 10% twice while unemployment also rose—stagflation.
Long Term
Paul Volcker replaced Burns in 1979, hiked rates above 19%, triggered back-to-back recessions, and finally killed inflation by 1983. Unemployment hit 10%. It took brutal medicine to undo Burns' mistakes.
Why It's Relevant Today
Goolsbee and Schmid's dissents echo the lesson: cutting rates before inflation is fully defeated risks repeating the 1970s catastrophe. The three-dissent vote shows some Fed officials fear Powell is making Burns' mistake.
The 1986 Revolt Against Volcker
1986
What Happened
Even legendary Fed Chair Paul Volcker faced internal rebellion. In 1986, the Fed Board outvoted Volcker on a rate cut, nearly prompting his resignation. The incident demonstrated that even the most respected Fed chair can lose control when Committee members hold fundamentally different economic views. Volcker had crushed inflation but faced enormous political pressure and internal dissent over keeping rates high.
Outcome
Short Term
Volcker nearly resigned but stayed on briefly before leaving in 1987, succeeded by Alan Greenspan.
Long Term
Inflation stayed conquered through the 1990s and 2000s—the "Great Moderation" era—validating Volcker's tight money approach.
Why It's Relevant Today
The December 2025 three-dissent vote represents the most divided FOMC since Volcker's era. History shows even successful Fed chairs face revolts when policy stakes are high and economic views diverge sharply.
The Yellen Dissent Era (2014-2016)
2014-2016
What Happened
Under Fed Chair Janet Yellen, FOMC members dissented 7.7% of the time—the highest rate since Volcker. Regional Fed presidents pushed for faster rate hikes while Yellen advocated patience as the economy recovered from the 2008 crisis. The divisions reflected genuine uncertainty about whether low unemployment would trigger inflation. Yellen's gradual approach ultimately proved correct—inflation stayed subdued.
Outcome
Short Term
Yellen raised rates slowly from 2015-2018, dissents gradually faded as economic data validated her approach.
Long Term
The gradual hiking cycle proved too slow—some economists argue it contributed to asset bubbles and left the Fed unprepared for future shocks.
Why It's Relevant Today
Current dissent levels exceed even Yellen's fractious era. The parallel: both periods featured fundamental uncertainty about inflation dynamics and appropriate policy speed. But today's stakes are higher—inflation is real, not theoretical.
