Major construction work continues at the U.S. Federal Reserve building in Washington, U.S., January 13, 2026. REUTERS/Nathan Howard
Macro Update
January opened with the Federal Reserve doing exactly what most economists predicted—nothing. At the January 28 meeting, the Federal Open Market Committee (FOMC) held the federal funds target range at 3.50% to 3.75%, snapping the Fed’s streak of cutting rates, which lasted from September through December of 2025. Chair Jerome Powell pushed back on the idea that further easing was imminent, noting that economic activity was expanding at a solid pace and the unemployment rate had showed signs of stabilization; however, inflation still remains elevated, and job gains remain weaker than expected. Two voting members dissented in favor of a quarter-point cut, but the message from the rest of the committee was that the bar for additional easing had been raised. Markets digested the pause without too much noise. The LSEG probability distribution index still penciled in one cut later in the year.
The real January shock came not from the Fed, but from the White House. In mid-January, President Trump announced a 25% tariff on any country doing business with Iran, followed shortly by a threat to impose a 500% tariff on importers of Russian oil. The uncertainty surrounding both moves immediately placed pressure on global trading partners. Gold rallied to a fresh record high as investors desperately looked for a safe-haven, and oil ticked to the upside as supply disruption risk reentered the conversation.
Underneath the tariff headlines, economic data came in mixed. December CPI came in at 2.7%, down from 3% in September and inching closer to the Fed’s 2% goal. The labor market showed signs of stabilization after a soft late-2025 stretch, and retail spending held up well throughout the holiday season. The combined effects of solid growth, easing but still-elevated inflation and a Fed that’s implementing its “wait-and-see” approach. This backdrop helps explain the massive rotation out of money market funds and into duration and credit.
U.S. Fund Market Summary
Equity Funds
U.S. equity funds took in roughly $15.2bn on a net basis in January, though the headline number masked a sharp rotation. U.S. Large-Cap Funds bled $44.5bn, the largest single category out of the month, as investors lightened up on what had become a heavily concentrated mega-cap trade. Small-Cap Funds shed another $9.3bn and Mid-Cap Funds gave back $8.9bn. The cash didn’t leave equities; it moved to sector specific names and international markets. U.S Sector Equity Funds gathered $22.9bn, U.S. Emerging Markets Equity Funds pulled in $18.3bn, and U.S. Developed International Market Funds added $10.9bn.
Given the rising volatility and uncertainty within the U.S. markets, the rotation into non-U.S. assets made sense. U.S. Multi-Cap and U.S. World Sector Equity Funds also gathered favorable inflows of $6.9bn and $7.3bn, respectively. It seems investors were tired of “waiting for the coast to clear amid U.S. volatility” and decided to “explore the other side of the pond”.
Fixed Income Funds
Fixed Income was the clear winner in January, with roughly $96.3bn in net inflows across the bond universe, the strongest inflow of any asset class. U.S. Short/Intermediate Investment Funds dominated with $43.4bn, by far the single largest category flow of the entire month. U.S. General Domestic Taxable Fixed Income Funds added $18bn, U.S. Municipals Debt Funds gather $11.4bn, and U.S. World Income Funds drew in $9.2bn. It appears investors have stepped out of cash and into the belly of the curve.
The lone weak spot was U.S. High Yield Funds, which lost $847m credit spreads showed early signs of widening due to growth concerns. Treasury exposure picked up the slack; Short/Intermediate Government & Treasury added $7.7bn, and longer Government & Treasury collected $2.1bn. Emerging Market debt also benefited, taking in $2.6bn.
Alternative Funds
U.S. Alternatives Funds posted a steady $4bn, in comparison with other asset classes, this value was modest, but consistent with the broader theme of investors diversifying around the concentrated large-cap trade.
Commodity Funds
Investors flocked to Commodity Funds, drawing in an impressive $5.6bn in net flows. The demand was driven by the flee to safe-haven investments as volatility started to climb due to tariff uncertainty. With inflation still on the table, a favorable size in commodities could indicate investors attempting to hedge against the unknown.
Money Market Funds
Money Markets Funds bled almost $40bn in January, with Taxable Money Market Funds alone losing $30.5bn and Tax-Exempt Money Market Funds shedding $9.5bn. That outflow was the mirror image of the fixed income inflow, investors who were parked in cash through late 2025 saw the Fed pause and decided it was time to extend duration.
