What’s Next for the Fed in 2026?

Key Takeaways

• After the Fed cut interest rates three times in 2025, markets widely expect it to cut once or twice in 2026.
• Analysts expect the divisions over monetary policy that defined the FOMC in 2025 to persist this year.
• Even with the imminent nomination of a new chair, analysts expect the Fed to continue operating independently of political pressures.

2025 was a bumpy year for the Federal Reserve, and 2026 is shaping up to be just as eventful. From White House political pressure to a government shutdown that disrupted essential economic data, the members of the Federal Open Market Committee spent much of the past year in uncharted territory.

As the US economy defied expectations, with growth soaring while inflation remained sticky and the labor market cooled, rare fractures (and dissenting votes) emerged among members, who could not reach a consensus on the best path for monetary policy. George Bory, chief investment strategist for the fixed income team at Allspring Global Investments, says the conflicts revealed some of the limits of Fed policy in 2025: “That inflation is well above target and not coming down, while unemployment is going up, underscores the challenge the Fed faces.”

While analysts widely expect the central bank to cut rates once or twice in the year ahead, they say the deepening divisions that characterized the second half of 2025 will likely continue.

Also of concern is the incoming announcement of a new chair to replace Jerome Powell when his term expires in May. The White House has not yet confirmed its nominee, but frontrunners include Kevin Hassett, who currently leads the National Economic Council, and Kevin Warsh, a former Fed governor. Both are expected to favor the rate reductions that President Donald Trump has pushed for. This sets up a potential conflict with those on the committee who would prefer to keep rates at current levels, given strong economic growth and the ongoing upside risk to inflation.

2025 Federal Reserve Recap

After holding steady for most of the year, the Fed cut interest rates three times in 2025, at its September, October, and December meetings. Those cuts were prompted by signs of cooling in the labor market, which had been relatively resilient in the early months while inflation remained elevated, thanks to the tariffs the White House announced in April. Declines in job growth over the summer prompted Fed officials to ease policy, favoring the side of their dual mandate focused on full employment.

2025’s cuts brought the federal-funds rate down to a range of 3.50%-3.75% from 4.25%-4.50% at the beginning of the year. Overall, the Fed has cut by 1.75% since rates peaked at 5.25%-5.50% in 2024.

Unusually for the central bank, those decisions were far from unanimous. All were accompanied by dissenting votes—one at September’s meeting, two in October, and three in December. October and December’s votes were split between one official who favored even larger cuts and two who preferred to keep rates steady. December’s “dot plot” of projections for future interest rates indicated that six officials (some non-voting) also preferred to hold rates steady that month.

At the crux of these divisions is an ongoing tension for monetary policymakers: The labor market appears to be cooling, while inflation is still above target. Growth overall is looking healthy. That puts the Fed in what Powell has repeatedly described as a very difficult position. Adjusting benchmark interest rates, which is the agency’s main tool, requires central bankers to favor one side of their mandate over the other.

		Federal Funds Rate: Historical Data and FOMC Projections

		Each dot represents one FOMC member’s federal funds rate forecast.

Source: Federal Reserve. Data as of Dec. 10, 2025.

How Many Times Will the Fed Cut Rates in 2026?

With three recent cuts in the rearview mirror, analysts widely expect the Fed to hold steady at its upcoming January meeting. After that, the consensus anticipates one or two more cuts in 2026.

Bond futures markets see 16% odds of a cut in January, according to data from the CME FedWatch Tool. Those odds rise to 45% by April, with another cut priced in for September. Altogether in 2026, the bond market is expecting 50 more basis points of easing, or two 25-point cuts.

Roger Hallam, global head of rates at Vanguard, thinks this looks reasonable, “given what we know about growth, inflation, and changes at the Fed [in 2026]. The economy is in a good place, but inflation is still not falling as quickly as [the Fed] would hope.”

Hallam predicts that data on the labor market will remain uncertain in the early stages of 2026. In the coming months, worsening unemployment could prompt more cuts sooner, while inflation that remains sticky for longer than expected (or heats up further) could fuel a more extended pause. “Ultimately, we expect the [Fed’s decisions] to be driven by economic developments,” he says.

Morningstar senior US economist Preston Caldwell is also expecting two rate cuts in 2026, one in the first half and another in the second. He says those cuts could happen slower than the pace the market is currently pricing for, since inflation could remain stickier at the start of the year as more tariff costs are passed through to consumers.

Allspring’s Bory characterizes the potential cuts as “mid-cycle adjustments” to help the Fed slowly bring interest rates down to a neutral range—a theoretical level that is neither accommodative nor restrictive for the economy. Most estimates of the neutral rate are around 3%.

“We are well-positioned to wait to see how the economy evolves,” Powell told reporters in December, noting that the federal-funds rate was already within striking range of neutral. Bory adds that he wouldn’t be surprised to see the Fed leave rates steady until the new chair takes over in the spring.

Jobs in Focus

Analysts say the Fed is likely to remain squarely focused on the labor market in the months ahead. The unemployment rate rose from 4.4% in September to 4.6% in November—a concerning trend, if it continues.

“As long as labor demand wanes and the unemployment rate increases, the path will be cleared for additional cuts, despite the vocal opposition from the hawks,” wrote Natixis chief US economist Chris Hodge in a report last month. “There is little doubt that Powell and the doves are firmly focused on the jobs market and have been since August.”

A job market that looks better than expected could change the calculus. Right now, “the labor market data probably matters more for the Fed than the inflation data,” says David Doyle, head of economics at Macquarie Group. He’s optimistic that improvement is coming on that front, so he is not expecting any rate cuts in 2026. He says the Fed will cut if deteriorating jobs data suggests they should, “but our view is that the data will guide them toward not cutting.”

Prepare for More Divisions

The next decision to cut or hold is not likely to be simple, especially if inflation remains sticky and the job market continues to cool. Bory of Allspring says divisions among policymakers are likely to persist, at least in the first half of 2026. “That tension between the dovish bias and the hawkish undertone is going to remain,” he says.

“The market is going to have to get probably a little more used to dissents as a feature of the FOMC voting pattern,” says Vanguard’s Hallam. He thinks tensions could increase this year, but that’s “not necessarily a bad thing … if [they’re] driven by reasonable disagreements in the way reasonable people are interpreting data.”

Bory believes those disagreements may erode the Fed’s credibility if they persist over the long term.

Hodge of Natixis writes that deepening policy disagreements could “be a positive” if they’re driven by “diversity of thought and produces rigorous debate,” but if politics is the key driver, that could damage the Fed’s credibility in the long run.

Is the Fed’s Independence at Risk?

Deeper concerns about the Fed’s independence came to the fore in 2025 as President Trump repeatedly attacked Powell’s credibility and appeared to seriously consider firing him. Those concerns were amplified by the president’s attempts to remove Fed governor Lisa Cook—a matter that has yet to be resolved by the Supreme Court. The imminent nomination of a new chair could reignite these concerns in 2026.

For now, Fed watchers say there are checks and balances to prevent politics from overtaking policymaking. “We are firm believers that while the Fed as an institution can get stretched from political pressures, it does have a lot of resiliency and a lot of layered independence to preserve its ability to focus on its mission,” says Allspring’s Bory. He points to the central bank’s committee-based structure as an insulator against short-term political pressures.

“A chair that is viewed as overly partisan, lacking in credentials, and promoting politically motivated policy will have a hard time gaining a majority, let alone a consensus,” writes Hodge of Natixis. “Ultimately, it will be very difficult for one person to shape FOMC decisions and dramatically alter monetary policy.”

Bory says there’s another important check on Fed independence in the bond market, which he describes as a “powerful tool that gives you a real-time impression of the confidence the market has in the [Fed’s] leadership.” If bond traders perceive that the Fed is straying too far from its mandate or bending to political pressure, yields can rise quickly and painfully. “The market can vote,” he says.

If a move is sharp enough, a quick correction in the bond market or the US dollar may “be enough to either make the committee pause, or even reverse, that course of action,” adds Doyle of Macquarie.