Fed Eyes Dual Cuts, Divisions Deepen Over 2026 Outlook

The U.S. Federal Reserve is widely expected to lower its benchmark interest rate by 25 basis points next week and again in December, marking a continued shift toward a more accommodative monetary stance, according to a recent Reuters poll of economists. The survey indicates that nearly all participants anticipate the federal funds rate will decline to a range of 3.75%–4.00% following the October 29 meeting, reflecting growing consensus that the Fed’s priority has turned toward stabilizing the labor market amid persistent inflationary pressures. This follows the central bank’s first rate cut since December, implemented last month to counter signs of a slowing economy.

The updated outlook represents a change from earlier projections, which had expected only one additional cut in 2025. The shift comes as policymakers weigh the competing risks of renewed inflation—potentially exacerbated by tariffs—against a softening labor market. Market sentiment appears to align with the more dovish expectations, with traders fully pricing in two additional rate reductions in futures contracts. Despite these expectations, Federal Open Market Committee (FOMC) members remain divided over the balance between supporting employment and curbing inflation.

The ongoing government shutdown, now in its third week, has delayed the release of key economic indicators, complicating the Fed’s assessment of both inflation and labor trends. Private-sector data suggest that hiring and layoffs remain moderate, pointing to stability rather than deterioration in employment conditions. According to the poll’s median forecasts, the unemployment rate is projected to remain around 4.3% through 2027, while inflation is expected to hover slightly above the Fed’s 2% target during the same period. Preliminary figures for September, delayed until October 24, are expected to show consumer inflation rising to 3.1% from 2.9% in August.

Economists remain divided on where interest rates will stand by the end of next year, with projections ranging from 2.25%–2.50% to 3.75%–4.00%. This uncertainty is compounded by speculation regarding potential leadership changes at the Federal Reserve once Chair Jerome Powell’s term concludes in May. A majority of economists—roughly three-quarters—believe the greater risk lies in the Fed cutting rates too deeply, potentially undermining its policy independence. Some analysts warn that political pressure from President Donald Trump to accelerate rate cuts could further challenge the Fed’s autonomy and complicate its long-term strategy.