Mark Zandi, chief economist at Moody’s Analytics, said a weak labor market, uncertainty over inflation and political pressure will lead the Federal Reserve to cut rates aggressively in early 2026.
Although markets and Fed officials themselves expect only modest easing over the next year, Zandi expects the central bank to cut rates by a quarter of a percentage point three times by mid-year.
“The decision to further ease monetary policy will be driven by the continued weakness in the jobs market, particularly in the first half of 2026,” the economist said in his recently published outlook for the year ahead. “It will take more time for businesses to be confident that changes in trade and immigration policy and other threats will not push them in the wrong direction before they start hiring again.”
“Until then, job growth remains insufficient to prevent further increases in the unemployment rate, and as long as the unemployment rate is rising, the Fed will continue to cut rates,” he added.
Mr. Zandi’s forecast is at least a step ahead of expectations from the market and the Fed, both of which suggest the pace of cuts will slow.
According to CME futures data via the FedWatch gauge, market prices are currently pointing to two rate cuts, with the first not occurring until at least April, and the second likely in the second half of this year, possibly around September.
Fed policymakers are offering a more cautious outlook.
The latest report, released in early December, shows that the grid of central bank officials’ forecasts has been downgraded just once over the course of the year. Officials expressed the possibility of further cuts, but the pace was slow, indicating that the meeting was a close call, according to minutes from the meeting.
But Zandi believes a combination of factors will push the Fed to act more quickly. One wild card is the possibility that President Donald Trump will reshape the central bank hierarchy.
Currently, three of the seven Federal Reserve Board members were appointed by President Trump: Christopher Waller, Michelle Bowman, and Stephen Milan. Mr. Milan’s term expires in January, so President Trump is likely to appoint another supporter to the post. From there, Chairman Jerome Powell’s term will expire in May, but his term as governor will end in early 2028. Additionally, the president has attempted to remove Gov. Lisa Cook from office, but courts have so far blocked her efforts.
That makes it even more likely that the president, a staunch supporter of low interest rates, will seek to impose his will on the Federal Open Market Committee, which sets interest rates.
“Trump will also press for lower interest rates. The Fed’s 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, political pressure on the Fed to cut rates further to support economic growth is likely to intensify.”
The FOMC will meet again on January 27-28. According to CME, based on market prices, there is only a 13.8% chance of a rate cut at this meeting.
