How many Fed rate cuts in 2026?
I assess a 60% chance that the Fed will make no 25-bp rate cuts in 2026, slightly below the market-implied probability but still reflecting a greater-than-even likelihood that policy stays on hold for the year.
Analysis
As of late May 2026 there remains substantial uncertainty around the path of inflation and labor market strength, but the dominant macro narrative through 2024–2025 was one of gradual disinflation and a cautious Fed that prioritized price stability; absent a clear collapse in inflation or a sharp rise in unemployment, the Federal Reserve is likely to stay data-dependent and avoid preemptive cuts. Market-implied probabilities and fed funds futures that currently favor no cuts suggest participants still believe the Fed needs more time to be confident that inflation is sustainably at target, and that financial conditions and underlying service-sector inflation remain watch points.
Historically the Fed has been reluctant to cut until there is convincing evidence that inflation is persistently returning to 2 percent and that the labor market has softened enough to reduce wage pressures, so the institutional bias is toward waiting; this behavioral pattern increases the plausibility of zero cuts in a year where headline inflation decelerates only gradually. At the same time, balance-sheet runoff, communication priorities (avoidance of market disruption), and the political optics of cutting too soon create additional frictions against early or multiple cuts.
Key downside risks to the 'no cuts' outcome include a sharper-than-expected growth slowdown or financial stress event that would push the Fed to act, and faster disinflation that reduces the real cost of delaying cuts; conversely, upside support for no cuts includes persistent service inflation, tight labor markets, and a Fed that remains focused on avoiding a premature easing. Given the lack of up-to-the-minute public data in this assessment, I weight the baseline slightly in favor of no cuts while recognizing that new shocks or clearly improving inflation metrics could flip probabilities quickly in either direction.
Arguments
For
- The Fed's historical propensity to wait for sustained disinflation and labor-market softening favors no cuts in 2026.
- Persistent service-sector inflation and tight labor markets would provide the Committee cover to hold rates steady through the year.
- Balance-sheet normalization and concerns about re-igniting inflation create an additional reluctance to cut preemptively.
- Markets currently price a majority chance of no cuts, implying limited near-term political or market pressure for easing.
Against
- A meaningful slowdown or recession risk would likely push the Fed to implement one or more cuts during 2026.
- If core inflation falls faster than expected and headline inflation moves sustainably toward 2 percent, the Fed could begin cutting.
- A sudden deterioration in financial conditions could force emergency or off-schedule cuts that count toward the 2026 total.
- Shifts in global monetary policy or a large fiscal drag could alter the macro backdrop and prompt easing sooner than markets expect.
Key drivers
- The trajectory of core and services inflation through the remainder of 2026 will be the primary determinant of Fed willingness to cut rates.
- Labor market strength, especially wage growth and unemployment trends, will dictate how much room the Fed feels it has to loosen policy.
- Fed communications and the median dot plot for 2026 will heavily influence market expectations and the timing of any cuts.
- Financial conditions and any episodes of stress in credit markets could force earlier easing even if inflation is not fully tamed.
- Fiscal policy and growth data (GDP/surprises) will shape whether slowing activity prompts a policy response in 2026.
Risk factors
- A sharp economic contraction or credit market shock would materially increase the probability of one or more cuts in 2026.
- A faster-than-expected decline in core services inflation would reduce the Fed's rationale for maintaining current rates.
- Unforeseen geopolitical shocks could either tighten or loosen financial conditions in ways that alter Fed decisions.
- Changes in Fed leadership, meeting cadence, or a pivot in forward guidance could shift markets' expectations rapidly.
- Strong and persistent wage growth despite disinflation would keep cuts off the table and raise the probability of no cuts.
Scenarios
Best case
For the 'Yes' outcome, best-case dynamics are continued gradual disinflation with persistent service inflation and a tight labor market that convince the Fed to keep rates unchanged for the full year, reinforcing the market consensus that no 25-bp cuts occur in 2026.
Most likely
The most likely scenario is that incoming data keep the Fed cautious and result in either zero cuts or at most a single, late-2026 cut if growth softens modestly, with the balance of probability tilted slightly toward zero cuts given the committee's historical risk-averse stance on easing.
Worst case
For the 'No' outcome, the worst case for the 'no cuts' prediction is a clear recession or systemic financial shock that forces the Fed into one or multiple emergency or scheduled cuts during 2026, producing two or more 25-bp reductions by year-end.
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