Fed cuts interest rates, but 2026 outlook remains murky

MANHATTAN (CN) — The Federal Reserve on Wednesday cut interest rates for the third and final time this year, though it is unclear if the central bank will remain as dovish next year.

The latest 0.25% cut brings the federal funds interest rate to 3.5% to 3.75%, but the Fed’s economic projections hint at only one more quarter-point rate cut next year and one more 25-basis-point rate cut in 2027.

“The hawks on the committee had a clear influence on the accompanying policy statement,” Stephen Brown, deputy chief North America economist at Capital Economics, wrote in an investor’s note. “Either way, we doubt the Fed will cut again until a new chair replaces Jerome Powell in May.”

The Fed has made its decisions the last couple months without the usual influx of government data, as most employment and inflation reports from the Labor Department have been delayed due to the government shutdown this fall.

Employment data shows a weakening but still stable labor pool, and the most recent inflation numbers from the Fed’s preferred measure — the personal consumption expenditures — show prices in September were 2.8% higher than a year ago, a hair above the Fed’s 2% target.

During a press conference after the announcement, Fed Chair Jerome Powell noted tariffs still haven’t been fully priced into the economy and that the dearth of employment data from the fall will be more fully explored when the Fed meets again in January.

“If you get away from tariffs, inflation is in the low twos,” Powell said. “So it’s really tariffs that’s causing most of the inflation overshoot.”

Three of the 12 voting members of the Federal Open Market Committee voted against the rate cut, though for different reasons. Recent Donald Trump appointee Stephen Miran wanted a 0.5% rate cut, while two other members wanted to keep the interest rate unchanged.

During the Fed’s last meeting in November, two of the voting members voted against the final statement, though coming from opposite sides of the “cut or don’t cut” debate.

During the press conference, Powell downplayed the disparate views. “The discussions we have are as good as any we’ve had in my 14 years at the Fed,” he said, adding it was a “close call” on whether to cut rates or leave them be.

“More cuts now imply fewer later,” Ryan Sweet, global chief economist at Oxford Economics, wrote in an investor’s note on Tuesday, noting the central bank likely won’t cut interest rates again until it meets next spring.

Sweet noted the labor market is in a “bend but not break” mode, and that will cause the Fed to restrain itself from multiple rate cuts next year. “If the economy unfolds as we anticipate, the Fed won’t want to pivot and hike rates because that usually hasn’t ended well for either the economy or financial markets,” he wrote.

Of course, the Fed’s trajectory depends on who chairs it, as Powell’s term ends in May 2026. President Trump said this week he narrowed down his candidate for the next chair to a handful of people, but many analysts say top White House economic advisor Kevin Hassett is the top contender and would do Trump’s bidding to push for massive rate cuts.

Powell was originally nominated as chair in 2017 by President Trump, then reappointed by President Joe Biden in 2022. However, Trump has railed against Powell, calling him “stupid” and “weak” for not slashing interest rates aggressively enough.

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