MNI INTERVIEW: Fed To Slow Easing, '26 Cuts Not Certain-Clouse

The Federal Reserve is nearing a point where interest rate cuts will move at a slower pace and potentially even stop altogether as economic growth holds up, meaning further easing in 2026 is not a certainty, former deputy director of the Fed Board's Division of Monetary Affairs Jim Clouse told MNI.

"A go-slow pattern is likely to emerge, whether that means they will or will not ease by 25 basis points in December or not. It's really kind of kind of a coin flip," said Clouse, who stepped down from his role in May, in an interview. "What is important is what they communicate about where the likely future trajectory of the funds rate will go."

Clouse pointed to the Fed's October meeting minutes released this week showing policymakers expressing a range of views. In particular, a group of of officials do not see the stance of monetary policy as clearly restrictive.

"I'm guessing that they have not really made a formal decision yet on what they will do in December," he said. "There is a wider range than usual of views about what the appropriate next step is. It's not like a slam dunk either way." (See: MNI INTERVIEW: High Bar For More Cuts As Neutral Nears-Kaplan) 

2026 CUTS NOT ASSURED 

Clouse expects communications at the December meeting to imply that further easing next year is not set in stone. 

"If they do end up easing a quarter point, I would anticipate a somewhat hawkish, or at least non-committal policy statement/press conference around where the path of policy would be going forward," said Clouse, who is now a senior fellow at the Andersen Institute for Finance and Economics. 

"In other words, I wouldn't expect their communications to be suggesting that further easings after December were a definite thing."

At the next meeting, FOMC policymakers are set to submit their forecasts for the Summary of Economic Projections. The September SEP saw a median participant expecting the fed funds rate to end 2026 at 3.4%, with a range from 2.6% to 3.9%. 

TWO-SIDED RISKS

Clouse, who was Secretary of the FOMC for five years and was responsible for the preparation of the minutes of FOMC meetings, said growth appears resilient but has softened of late. 

"The pace of expansion appears to have slowed, and there do seem to be some downside risks to employment, particularly after the kind of very weak job numbers that came in in the middle of the summer," he said, adding that the most recent September jobs report has likely not altered committee members' views of the outlook. 

"A lot of the FOMC participants are concerned about the fact that inflation remains above their target, and has actually edged up some by by some metrics," he said. "The delays in data certainly make the FOMCs job harder." (See: MNI INTERVIEW: Fed Dec Pause Would Preserve Options - Sheets)