The next Fed meeting is scheduled for January 27-28.
At a time when markets and U.S. central bank officials are maintaining a wait-and-see stance, a new forecast from Moody’s Analytics has upended expectations. According to chief economist Mark Zandi, 2026 will not be the year of "gradual adjustment," but rather a year of an aggressive pivot for the Fed. The combined pressure from a labor market showing signs of fatigue and upcoming shifts in the political landscape appears to be creating a volatile mix. Zandi warns that the traditional Fed independence is under direct threat, as Trump administration interventions and strategic appointments of new members are expected to break the resistance of central bankers. With the clock ticking toward the midterm elections, the question is no longer whether interest rates will fall, but how quickly the Fed will succumb to the political and economic necessities of the moment.
Three interest rate cuts
Although markets and Fed officials themselves predict only a mild easing for the coming year, Zandi expects the central bank to proceed with three rate cuts of 0.25% each before the middle of 2026. "Behind the decision for further monetary policy easing will be the continued softening of the labor market, particularly in early 2026," the economist wrote in his recent report for the coming year. "It will take more time for businesses to feel certain that they will not be blindsided by shifting trade and immigration policies and other threats before they resume hiring." "Until then, job growth will remain insufficient to prevent further increases in unemployment, and as long as unemployment rises, the Fed will lower interest rates," he added.
Deviations in forecasts
Zandi's forecast is at least one step ahead of the expectations of both the market and the Fed, which indicate a slower pace of reductions. The market expects that CME FedWatch futures prices show two cuts, with the first not expected before April and the second likely in September. Fed officials maintain an even more "cautious" stance. Their expectations chart (dot plot) from December shows just one cut for the entire year. Minutes from the last meeting showed that the decision to cut was marginal.
The "Donald Trump" factor
Zandi believes a combination of factors will force the Fed to move faster. One unpredictable factor is the possibility that President Donald Trump will reshape the central bank's hierarchy. Currently, three of the seven Fed governors are Trump appointees (Waller, Bowman, Miran). With Miran's term expiring in January, Trump is expected to appoint a loyalist to this position. Additionally, Chairman Jerome Powell's term at the helm expires in May, although he remains a governor until 2028. Furthermore, the American president is attempting to remove Governor Lisa Cook, though courts have blocked him so far. This increases the likelihood that Trump, a staunch supporter of low rates, will exert his influence on the Rate-Setting Committee (FOMC). "Trump will also push for lower rates. Federal Reserve independence will gradually erode as the President appoints more members, including the Fed chair in May," Zandi wrote. "Given the upcoming congressional midterm elections, political pressure on the Fed to further cut rates to support economic growth is likely to intensify." It is noted that the FOMC meets again on January 27-28. Markets currently give only a 13.8% probability for a cut at this meeting.
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