Moody's chief economist expects the Federal Reserve to adopt aggressive easing measures in early 2026 and cut interest rates three times before mid-year.

Moody's Analytics Chief Economist Mark Zandi said that a weak job market, uncertain inflation outlook, and political pressures may force the Federal Reserve to take more aggressive rate cuts in early 2026. Although the current market and Fed officials themselves expect a relatively mild pace of monetary policy easing over the next year, Zandi believes that the Fed may implement three 25 basis points rate cuts before mid-2026. In his recent annual outlook, he wrote that the core reason for further easing monetary policy will be the still weak job market at the beginning of 2026. Zandi pointed out that businesses still need time to be certain that they will not be caught off guard by changes in trade, immigration policies, and other potential risks, making it difficult for hiring activity to significantly recover. "Until then, job growth is not enough to prevent the unemployment rate from continuing to rise, and as long as the unemployment rate is rising, the Fed will choose to cut rates." This assessment is clearly ahead of market and official expectations. According to CME futures data and reflected through the CME FedWatch tool, the market is currently pricing in only two rate cuts in 2026, with the first not expected until at least April and the second likely to occur in the second half of the year, around September. In contrast, the Fed's internal attitude is more cautious. The central bank's updated "dot plot" of rate paths in December showed that officials expected only one rate cut for the whole year. Meeting minutes also showed that whether to cut rates at that time was a "deadheat" discussion, although officials acknowledged that rate cuts could continue in the future, but at a more restrained pace. However, Zandi believes that the combination of multiple factors may lead the Fed to act more quickly, with one important variable coming from the political realm, President Trump's potential reshaping of the Fed's personnel structure. Of the seven Fed governors, three have already been appointed by Trump; with Governor Mester's term expiring in January, Trump is expected to nominate another like-minded candidate. In addition, current Chairman Powell's term as chairman will expire in May (his governorship continues until early 2028), and the president is also trying to push for the removal of Governor Quarles, although this is currently being blocked by the courts. Zandi believes that these changes will increase the likelihood of the president pressuring the Federal Open Market Committee (FOMC). He said, "Trump has always advocated for lower rates. With the president appointing more FOMC members and appointing a new Fed chairman in May, the independence of the central bank will gradually weaken." As the midterm congressional elections approach, political pressure to further cut rates to support economic growth may continue to increase. The next Fed interest rate meeting is scheduled for January 27-28. According to CME data, the market currently only assigns a probability of about 13.8% to a rate cut at that meeting.