Federal Reserve, Powell face challenges in 2026
US Federal Reserve Chairman Jerome Powell holds a press conference after the Federal Open Market Committee’s two-day meeting at the US Federal Reserve in Washington on December 10, 2025.
Kevin Lamarque | Reuters
The Federal Reserve will face a host of political and policy challenges heading into 2026, headlined by a new seat and an economy fueled by both tailwinds and headwinds that will make policymakers’ choices even more important.
The central bank, which has made three consecutive interest rate cuts, is expected to follow a more moderate path for the next year; During this period, it may be difficult to make additional interest rate cuts, given strong growth expectations and ongoing inflation pressures.
One thing is certain: After a year of extraordinary turmoil surrounding the Fed, 2026 looks set to deliver more of the same.
“I think it’s going to be a huge spotlight. There’s going to be a lot of intrigue,” said Nationwide chief economist Kathy Bostjancic. “There’s still a lot of uncertainty that keeps the Fed in the spotlight and possibly on the hot seat.”
Last year we saw the Fed step into this spotlight like never before.
As he begins his second term in the White House, President Donald Trump has repeatedly threatened to fire Fed Chairman Jerome Powell for not acting faster on cutting interest rates. In mid-year, the Fed came under fire again, this time for cost overruns on a renovation project it was undertaking at its headquarters in Washington.
Meanwhile, Trump attempted to impeach Governor Lisa Cook over allegations (yet unproven and not even made as official charges) that she committed mortgage fraud. All of this took place as some 11 candidates were evaluated during an interview process led by Treasury Secretary Scott Bessent, determining who would replace Powell when his term ends in May.
If this all sounds overwhelming, consider that 2026 will begin with a Supreme Court hearing scheduled for Jan. 21 that will decide whether Trump has the authority to remove Cook. A week later, the Federal Open Market Committee will vote on interest rates. At some point in the month, Trump is expected to announce his pick for Fed chairman. Powell, who has been cautious on this issue so far, will also have to explain whether he plans to complete his term on the Board of Directors, which will last until January 2028.
There are also plenty of dissenters in recent rate votes, and the new regional chairmen who will join the FOMC have a hawkish bent, meaning they will likely resist additional cuts.
“It’s still a difficult situation for the Fed,” Bostjancic said.
Focus on politics
Still, when it comes to policy, most on Wall Street expect the Fed to put the noise to the back burner and continue on its path of cutting its benchmark interest rate some more until it approaches the neutral level of around 3%. Neutral is considered a point that neither supports nor stalls economic activity, and the funds rate is just half a point above the level where most on the FOMC think rates will fall in the long run.
“Chairman Powell helped engineer three consecutive 25 basis point rate cuts. It’s not as if the FOMC is standing in the way of a rate cut,” Bostjancic said. When it comes to more disruption, “For us, that’s [about] Economic data.”
Bostjancic thinks the data points to two disruptions this year; one in the middle of the year and the other towards the end. While the Fed’s “dot plot” expectations chart only points to a cut, here are the outliers: Mark Zandi, chief economist at Moody’s Analytics and Citigroup, thinks labor market weakness points to three.
Powell and his colleagues have stood by the idea that they won’t be bullied into cuts and will actually be guided by data.
Torsten Slok, chief economist at Apollo Global Management, thinks the economy will be strong enough for the Fed to not cut further and will only see one cut ahead.
“The problem is that the headwinds are really shifting for the U.S. economy,” Slok said in an interview with CNBC on Friday. he said.
He said that while there will be tariffs, inflation and a general atmosphere of uncertainty in 2025, fiscal stimulus and a stabilizing labor market will support growth.
“In my view, it looks like the headwinds are starting to accumulate and make it even more difficult for the Fed to cut rates this year,” Slok added.
The role of artificial intelligence
A wild card will be the role AI plays in economic growth.
RSM chief economist Joseph Brusuelas said it will be crucial for the Fed to assess the impact of artificial intelligence on the economy, which is seen as both a productivity booster and a potential impediment to hiring.
“The Fed faces a real challenge in communicating its strategy this year,” Brusuelas said. “We have a huge investment flowing into very complex technologies, and the Federal Reserve will need to communicate their basic view of what that means.”
Economy after recession in early 2026 It grew rapidly in the middle two quarters and is on track to accelerate by 3% in the fourth quarter, according to preliminary data. Atlanta Fed.
In addition to helping propel the broader economy, AI-related stocks have also been a highlight of another stellar year on Wall Street that saw double-digit gains followed by major averages.
Brusuelas said it would be difficult to adjust monetary policy in such an environment.
“They will need to provide strategic direction to the central bank at a time when the economy is clearly moving towards the integration of this advanced technology in the production of goods and the provision of services,” he said. “This is a really big potential turning point around policy that needs to happen.”
