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Federal Reserve officials are holding firm on interest rates, signaling that the fight against inflation isn't over yet. Despite significant progress since the historic price spikes of 2022, inflation remains stubbornly above the central bank's 2% target, creating a cautious atmosphere around future policy decisions.

Here's what you need to know:

• Rate Cuts on Pause: The Fed chose not to lower interest rates at its last meeting, prioritizing the battle against inflation which has lingered above 2% since 2021.

• Post-Pandemic Shadow: The unexpected inflation surge that began in 2021 continues to heavily influence the Fed's strategy, prompting a more measured approach.

• Inflation vs. Jobs: Officials are weighing the dual risks of persistent inflation against a cooling job market, leading to different opinions on the right time to ease policy.

The Fed's Persistent Inflation Problem

The aftershocks of the post-pandemic economy are still a primary concern for the Federal Reserve. While the Consumer Price Index has cooled considerably to a 2.7% annual increase in December—a sharp drop from its 9% peak in 2022—it has not yet returned to the Fed’s 2% goal.

This persistent inflation prompted the Federal Open Market Committee (FOMC) to keep its key interest rate steady last month. The decision followed three consecutive quarter-point cuts designed to support the job market, but officials have indicated that inflation worries prevented another reduction.

The federal funds rate is a critical tool for the central bank, influencing borrowing costs across the economy. The FOMC raises rates to curb inflation and lowers them to stimulate economic activity and employment.

A Split View on the Path Forward

Inside the Fed, a debate is unfolding over which risk is greater: inflation staying too high or the job market weakening too much.

Thomas Barkin, president of the Federal Reserve Bank of Richmond, emphasized the need for vigilance. "While we've made a lot of progress on inflation, it still remains above our target," Barkin said in a speech Tuesday. "That's been the case since 2021." He cautioned against blaming one-off factors like tariffs or lags in housing cost data, stating, "I take this sustained miss seriously."

Raphael Bostic, president of the Atlanta Fed, shared this cautious sentiment. "My concern for the past three or four years has been that inflation is too high," he told CNBC last week. "We've made good progress, but for the last two years or so we've been kind of stuck... I would say that we should be waiting and be more patient."

However, not all officials agree. Fed Governor Michelle Bowman expressed confidence that inflation would reach the 2% target soon and suggested the central bank should cut its key rate three times in the next year.

"I recognize and appreciate that other FOMC members may be concerned that inflation remains somewhat elevated," Bowman said. "However, absent a clear and sustained improvement in labor market conditions, we should be ready to adjust policy to bring it closer to neutral." She also noted she would not "immediately" react to a high January inflation report, as the data can be skewed by seasonal adjustments.

Lessons From the 2020 Miscalculation

The Fed's current caution is sharpened by recent history. Newly released transcripts from FOMC meetings in early 2020, made public after a five-year delay, reveal that officials were caught completely off guard by the inflationary wave that followed the pandemic.

In an emergency meeting on March 15, 2020, policymakers viewed mass unemployment and disinflation—falling prices—as the primary economic threats. They slashed interest rates to nearly zero, with then-Governor Richard Clarida stating, "The net effect of the virus is likely to be disinflationary, not inflationary." San Francisco Fed President Mary Daly added at the time, "Even when the pandemic abates, inflation is going to be an ongoing concern."

This misjudgment is a fresh memory for the seven current FOMC members who were present in 2020, including Barkin.

"Inflation spiked, helping us remember a painful lesson from the '70s—just how much we all hate inflation," Barkin said this week. "It feels unfair, it creates uncertainty, and frankly it's just exhausting."

Given this history, the market widely expects the FOMC to hold rates steady through its next two meetings. According to the CME Group's FedWatch tool, traders are pricing in a 66% probability of the first rate cut occurring in June.

Source: xtb

Russian and Ukrainian officials are engaged in a second day of U.S.-brokered negotiations aimed at ending the war, but major disagreements over Ukrainian territory and future security guarantees remain significant obstacles.

The talks, held in Abu Dhabi, have produced one small sign of progress: an agreement for another prisoner-of-war exchange. Steve Witkoff, the White House envoy leading the U.S. mediation effort, announced on February 5 that a total of 314 prisoners would be released. This move offers a rare moment of consensus in a conflict that has reportedly killed or wounded nearly 2 million people since Russia’s invasion on February 24, 2022.

Cautious Optimism Meets Sobering Reality

Ahead of the meetings, both sides hinted at the possibility of a breakthrough. Kirill Dmitriev, the Kremlin's lead negotiator, mentioned "progress" and positive movement on February 5. His Ukrainian counterpart, Rustem Umerov, described the first day of discussions as "meaningful and productive, focusing on concrete steps and practical solutions."

Despite these optimistic statements, Russia’s military actions continue unabated. On the eve of the talks, Russia launched one of its largest aerial assaults of the war, targeting Ukraine's energy infrastructure and compounding the suffering of civilians in the middle of a harsh winter.

Kremlin spokesman Dmitry Peskov reinforced Moscow's firm stance, telling reporters that Russia's position remains unchanged and is "absolutely clear and well understood by both Kyiv and the American negotiators."

The Core Sticking Points

The gap between Moscow and Kyiv has narrowed slightly, but fundamental disagreements persist. The negotiations are centered on two critical issues that have stalled previous efforts.

The Status of Donbas

The primary point of contention is the territory in Ukraine's Donbas region that Kyiv currently controls but Moscow claims as its own. Ukrainian President Volodymyr Zelenskyy has proposed creating a demilitarized zone, potentially monitored by European peacekeepers, but Russia has unequivocally rejected this proposal.

Future Security Guarantees

Kyiv is also demanding binding security guarantees from the United States and other Western allies. These guarantees would legally obligate other nations to intervene if Russia were to launch another attack in the future.

Ukrainian political analyst Ihor Reiterovych has urged the West to provide strong assurances and avoid repeating the mistakes of the 1994 Budapest Memorandum. That agreement, signed by the U.S., Russia, and Britain, was supposed to guarantee Ukraine's territorial integrity in exchange for the country giving up its nuclear arsenal.

Expert Skepticism and the Path Forward

Analysts remain skeptical about the prospects for a comprehensive settlement. Markus Ziener, a fellow with the German Marshall Fund and former Moscow correspondent, acknowledged the prisoner swap as a positive step but expressed doubts about a broader resolution.

"I'm rather skeptical if we get to the nitty-gritty," he told RFE/RL, adding, "So far, there is not really much that gives us hope that a settlement of the war is within reach."

Ziener questioned Russia's sincerity, noting the incongruity of negotiating for peace while simultaneously launching massive aerial attacks. "If I want to negotiate a peace settlement, I would not hammer Ukraine and pound them the way they do," he observed.

For Ukraine, the immense sacrifices made during the war make concessions difficult. "Given all the sacrifices Ukraine has made so far... it's very difficult for Ukraine to say, OK, well, we'll cede to the Russian demands," Ziener explained.

The talks, which include current and former intelligence officials, mark a continuation of direct negotiations that resumed last May after a long pause. President Donald Trump has expressed frustration that the war continues, having made its resolution a top foreign policy priority. The U.S. delegation includes not only Witkoff, who has met with Russian President Vladimir Putin seven times in the past year, but also Trump's son-in-law, Jared Kushner.

Source: Bloomberg

Note: The gold market operates through two primary pricing mechanisms. The first is the spot market, which quotes prices for on-the-spot purchase and immediate delivery. The second is the futures market, which sets prices for delivery at a future date. Due to year-end positioning market liquidity, the December gold futures contract is currently the most actively traded on the CME.

Source: kitco

German factory orders posted an unexpected and dramatic increase in December, rising at the fastest rate in two years and signaling a potential rebound for the nation's critical manufacturing sector.

Demand surged by 7.8%, a figure that far outpaced all predictions from a Bloomberg survey of economists, whose median estimate was a 2.2% decline. According to the statistics office, this marked the fifth consecutive monthly gain. Even excluding large-scale orders, the metric still would have climbed by 0.9%.

Figure 1: German factory orders showed a significant monthly increase in late 2025, defying previous periods of volatility and contraction.

An Economy Seeking Sustainable Growth

A revival in industrial activity is widely seen as essential for a lasting recovery in Europe's largest economy, which managed to narrowly avoid a triple-dip recession in 2025. Chancellor Friedrich Merz has labeled the country's recent growth as "unsatisfactory" and made its revival a key priority.

The government is forecasting gross domestic product to expand by 1% this year, largely driven by increased spending on infrastructure and defense. Some institutions are more bullish; the Bundesbank anticipates stronger growth, and Deutsche Bank has projected a 1.5% expansion.

Support is also expected from the delayed impact of previous interest-rate cuts by the European Central Bank. ECB officials are set to conclude their first policy meeting of 2026 on Thursday, with no changes to borrowing costs anticipated.

Persistent Risks and Structural Challenges

Despite the positive data, Germany's economy still faces significant headwinds. Key risks include potential disruptions from US President Donald Trump's trade policies and intensifying competition from China.

Internally, the country continues to grapple with long-standing structural issues, such as excessive bureaucracy and a shortage of skilled workers. Bundesbank President Joachim Nagel, along with many economists, has urged Chancellor Merz to act on promises to cut red tape and enhance the nation's competitiveness.

Domestic Demand Fuels the Jump

The German Economy Ministry confirmed in a statement that the surge in factory orders was primarily driven by domestic demand.

"For several months now, large domestic orders... have been causing fluctuations in monthly orders," the ministry explained, citing public procurement for the modernization of the German armed forces and orders related to the Special Fund for Infrastructure and Climate Neutrality.

In contrast, the ministry noted that "the order intake from abroad has tended to be weaker and subject to greater fluctuations in view of trade and geopolitical uncertainties."

A Mixed Picture Across Europe

Looking ahead, German industrial production figures are scheduled for release on Friday, with economists expecting a modest decline of 0.3%.

Meanwhile, separate data from neighboring France painted a different picture for December. According to the Insee statistics office, French manufacturing weakened, with both industrial and factory production falling month-over-month due to a slump in aeronautical manufacturing.

Figure 2: French industrial and manufacturing production data from late 2025 showed a period of weakening, contrasting with the surprising strength in German orders.