Economist Mark Zandi sees the Fed surprising with three rate cuts in first half of 2026
Weakness in the labor market, uncertainty about inflation and political pressure will push the Federal Reserve to aggressively cut interest rates in early 2026, according to Mark Zandi, chief economist at Moody’s Analytics.
Although markets and Fed officials see only modest expansion next year, Zandi expects the central bank to make three rate cuts of a quarter-point each before mid-year.
“The decision to ease monetary policy further will be driven by the still-weakening employment market, especially in early 2026,” the economist wrote in his recently published assessment of the coming year. “It will take more time for businesses to make sure they won’t be led astray by changing trade and immigration policies and other threats before resuming hiring.”
“Until then, employment growth will be insufficient to prevent further increases in unemployment, and the Fed will cut interest rates as long as unemployment rises,” he added.
Zandi’s forecast is at least a step ahead of both the market’s and the Fed’s expectations, both of which point to reductions at a slower pace.
According to CME futures data, market prices are currently pointing to two disruptions; the first won’t arrive until at least April, and the second will likely occur in the back half of the year, possibly around September. FedWatch measures.
Fed policymakers take a more cautious view.
The central bank’s chart of expectations for individual officials shows only one cut for the entire year, according to an update presented in early December. Minutes of that meeting showed that the cutback at the meeting was a close call, with officials expressing the possibility of further cuts but at a slow pace.
But Zandi thinks a combination of factors will cause the Fed to move faster. One wild card: President Donald Trump’s potential to remake the central bank’s hierarchy.
As things stand now, three of the seven Fed governors are Trump appointees: Christopher Waller, Michelle Bowman and Stephen Miran. With Miran’s term ending in January, Trump is likely to appoint a loyal person to the post. From there, Chairman Jerome Powell’s term will end in May, but his term as governor will last until early 2028. Additionally, the president is in the process of impeaching Gov. Lisa Cook, although the courts have so far blocked it.
That raises the possibility that the President, a staunch advocate of lower interest rates, will try to impose his will on the rate-setting Federal Open Market Committee.
“Trump will also push to lower interest rates. The independence of the Federal Reserve will gradually be eroded as the president appoints more members to the Federal Open Market Committee, including the Fed chair in May,” Zandi wrote. “Given the upcoming midterm congressional elections, political pressure for the Fed to lower interest rates further to support economic growth is likely to intensify.”
The FOMC will meet again on January 27-28. According to CME, market prices suggest only a 13.8% chance of a cut at this meeting.
