MNI: Fed Dots To Show 1-2 Rate Cuts Next Year - Ex-Officials

A fragile consensus for a December interest rate cut from the Federal Reserve is likely to produce a negotiated pause for early 2026, with the center of the FOMC projecting one to two more steps down toward neutral in 2026, former Fed officials told MNI.    

"When you’re faced with so much uncertainty and so many conflicting and offsetting moving parts in the economy, committee participants may be conservative about changing their forecasts. Estimating a new forecast can be quite messy. Committee participants may choose to ride with his or her past forecast for the time being," former Atlanta Fed President Dennis Lockhart said in an interview.

That likely means rates in a range of 3%-3.5% by the end of 2026, similar to the Fed's September projections, which had a median FOMC participant view of one cut next year. The central bank is largely expected to lower the fed funds rate range to 3.5% to 3.75% this week. 

Additional easing steps would likely come later in 2026 unless the broad direction of the U.S. economy shifts, former officials said. That's particularly true if Fed Chair Jerome Powell forges his December consensus by offering hawkish language in the post-meeting statement or press conference.  

"I expect there'll be some moderate changes to the statement that will suggest they're in no rush to cut further. And Powell will say the same thing," former director of the division of monetary affairs at the Fed Board William English said. "They'll be easing later in the year, not right away in January."

DUAL RISKS

Even after a federal government shutdown that temporarily drew the curtain on official data, the dynamics that prevailed in the economy before are likely more or less still in place, the former officials said.   

The most likely outcome remains "the economy trundles along, the unemployment rate is a little high, a little above its longer run level but doesn't go up much further, and inflation gradually comes down to target over two or three years as policy normalizes or moves to neutral over the same period," English said. 

The risks cut in both directions, underpinning the divides on the FOMC, the former officials said. 

The most recent private data on employment "present an ambiguous situation but one that does not seem to be collapsing by any stretch of the imagination," Lockhart said.

Goods prices that are affected by tariffs are a relatively small fraction of the basket, while services prices may rise going forward because they are more sensitive to whether the firms think the Fed can keep inflation under control, former St. Louis Fed President James Bullard said. (See: MNI INTERVIEW: Fed Faces Politically Tumultuous Year - Bullard) 

NEW CHAIR

The path of Fed policy will hinge in part on how much control President Donald Trump gains over the FOMC. The Supreme Court will consider limits to the president's ability to fire Fed governors, and Trump will appoint a new Fed leader to succeed Powell for his term that concludes in May. 

"The new chair will likely be looking to cut rates more, and I don't know how that plays out," English said. "Given just how difficult the decisions have been of late, I think It's going to be hard to get a consensus for significant easing unless the economy really does weaken." 

Lockhart was more circumspect. "Much will depend on how the new chair conducts himself once in the position. It’s my observation that the chair influences how the Fed operates but how the Fed operates also controls the chair."