Economist Sees the Fed Surprising with Three Rate Cuts in First Half of 2026

• Labour market weakness, uncertainty about inflation and political pressure will push the Federal Reserve to lower interest rates aggressively in the early part of 2026, according to Mark Zandi, chief economist at Moody’s Analytics. Though markets and Fed officials themselves see only modest easing in the year ahead, Zandi expects the central bank to enact three cuts of a quarter percentage point each before midyear.
• “Behind the decision to ease monetary policy further will be the still flagging job market, particularly in the early part of 2026,” he wrote. “It will take more time for businesses to feel certain that they will not be wrong-footed by shifting trade and immigration policies and other threats before they resume hiring.” “Until then, job growth will remain insufficient to forestall further increases in unemployment, and as long as unemployment is on the rise, the Fed will cut rates.”
• Zandi’s forecast is at least a step ahead of both market and Fed expectations, both of which point to a slower pace of reductions. Market pricing currently points to two cuts, the first not coming until at least April and the second more likely in the back half of the year, probably around September, according to CME futures data.
• Fed policymakers have an even more cautious outlook. The central bank’s grid of individual officials’ expectations indicates just one cut through the entire year, according to an update presented earlier in December. Minutes showed the cut at the meeting was a close call, with officials seeing the likelihood of additional reductions but at a tepid pace.
• Zandi thinks the confluence of factors will cause the Fed to move more quickly. One wild card is the potential for President Donald Trump to remake the central bank’s hierarchy, with Trump appointees already on the board and more changes possible as terms expire, including Jerome Powell’s chairmanship in May and efforts to remove Governor Lisa Cook.
• “Trump will also pressure for lower interest rates. Federal Reserve independence will steadily erode as the president appoints more members to the Federal Open Market Committee, including the Fed chair in May,” Zandi wrote, adding that political pressure will intensify heading into the midterm elections. The FOMC meets again Jan. 27–28, and market pricing is putting just a 13.8% probability of a cut at that meeting.

(Source: CNBC)