Labor 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,” the economist wrote in his look at the year ahead published recently. “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,” he added.
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 as expressed through its FedWatch gauge.
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 from that meeting showed the cut at the meeting was a close call, as officials expressed the likelihood of additional reductions but at a tepid pace.
But Zandi thinks the confluence of factors will cause the Fed to move more quickly. One wild card: the potential for President Donald Trump to remake the central bank’s hierarchy.
As things stand now, three of the seven Fed governors are Trump appointees: Christopher Waller, Michelle Bowman and Stephen Miran. With Miran’s term expiring in January, Trump is likely to appoint another loyalist to the post. From there, Chair Jerome Powell’s term at the helm expires in May, though his term as governor runs into early 2028. In addition, the president is in the process of trying to remove Governor Lisa Cook, though courts have blocked him so far.
That adds to the likelihood that the president, a staunch advocate of lower interest rates, will look to exert his will on the rate-setting Federal Open Market Committee.
“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. “Given the approaching midterm congressional elections, the political pressure on the Fed to lower rates further to support economic growth is likely to intensify.”
The FOMC meets again on Jan. 27-28. Market pricing is putting just a 13.8% probability of a cut at that meeting, according to the CME.
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