How many Fed rate cuts in 2026?
I assess a 72% probability that the Fed will not cut rates at any point in 2026, reflecting a modestly lower conviction than the market-implied ~80% but still a strong likelihood given likely inflation and labor dynamics and the Fed's demonstrated reluctance to ease prematurely.
Analysis
Market prices currently imply a high probability (around 80%) of no Fed cuts in 2026; I treat that as a strong prior but downgrade slightly to 72% because a number of downside scenarios could produce at least one cut late in the year. The market-implied view captures both the Fed's recent hesitation to ease without clear disinflation and the uncertainty about growth, but it can underweight low-probability shocks that force emergency action or a recession that would make cuts more likely.
From a macro fundamentals perspective, the central determinants are the inflation trajectory, labor-market tightness, and real economic growth: if inflation remains at or above the Fed's target band and payrolls/employment stay firm, the case for holding rates through 2026 is strong and supports a no-cuts outcome; conversely, a significant weakening of demand or a sharp fall in inflation toward or below target would materially increase cut odds. Historical experience shows the Fed typically requires several quarters of clear, sustained easing in inflation and/or a marked rise in unemployment before initiating cuts, which favors the no-cuts side absent a distinct deterioration.
Policy-framing and institutional incentives also argue for inertia: the Fed prefers to avoid acting preemptively in a way that risks reigniting inflation, and the communications and operating framework developed in recent cycles has emphasized data dependence and patience before easing. However, the possibility of emergency cuts or off-calendar actions—while low-probability—exists and is explicitly allowed by the market rules, so tail events (financial stress, sharp global slowdown, major geopolitical shock) keep the risk of at least one cut alive and justify a probability materially below 100%.
Finally, market and financial conditions themselves are a feedback channel: if long-term yields rise and financial conditions tighten substantially, that could substitute for policy tightening and reduce the need for further rate hikes while still not prompting cuts; if conditions ease significantly on their own, the Fed may still refrain from cutting until data confirm a durable weakening, but easier financial conditions modestly raise the chance of a late-year cut relative to a strict data-only baseline.
Arguments
For
- Persistent or sticky inflation above the Fed's comfort range would keep policy restrictive and make cuts unlikely.
- A still-tight labor market with continued wage growth reduces the Fed's incentive to ease policy.
- The Fed's institutional preference for waiting for durable evidence before easing favors holding rates.
- If growth remains modestly positive without a recession, the Fed can justify no cuts to avoid re-accelerating inflation.
- Tight financial conditions or higher longer-term yields can act like policy tightening and reduce pressure to cut.
- Recent historical episodes show the Fed often delays cutting until clear signs of deterioration appear, supporting no cuts in 2026.
Against
- A materially weaker-than-expected macroprint or a recession in 2026 would raise the probability of at least one cut.
- An abrupt fall in inflation expectations could prompt the Fed to cut to avoid a disinflationary spiral.
- Severe financial stress or a banking crisis could force emergency out-of-schedule cuts even if headline data are mixed.
- Political and market pressure for easier policy in the face of economic pain could shift the Fed's calculus toward cutting.
- Global growth weakness and commodity-price declines could reduce inflation and increase the case for easing.
- Late-year data revisions or surprises could produce a narrow window where a single 25bp cut is politically and technically justifiable.
Key drivers
- Core and headline inflation trajectory through 2026 and whether inflation shows sustained decline toward the 2% target.
- Labor market strength, especially wage growth and unemployment trends, which determine the Fed's risk tolerance for cutting.
- GDP growth and recession risk in the U.S., since a downturn materially raises the probability of at least one cut.
- Financial stability and stress in the banking or shadow-banking sectors that could force emergency easing.
- Fed communications, dot-plot expectations, and minutes that anchor market and policymaker expectations.
- Global growth and commodity shocks that transmit to U.S. inflation and growth and influence policy choices.
Risk factors
- A sharp and sustained drop in inflation toward or below 2% that encourages earlier easing.
- Material economic weakness or an outright recession that forces the Fed to cut to support demand.
- Severe financial stress or a liquidity crisis prompting emergency, out-of-calendar rate cuts.
- Unexpected large fiscal tightening or negative supply shocks that rapidly reduce demand and inflation.
- Significant changes in market-implied inflation expectations undermining the Fed's confidence in price stability.
- Geopolitical shocks that lead to pronounced global economic slowdown and spill into U.S. growth.
Scenarios
Best case
No cuts occur in 2026 because inflation gradually returns to target at a measured pace while employment remains strong, allowing the Fed to hold policy steady through the year and preserve optionality for 2027.
Most likely
The Fed refrains from cutting for most of 2026, with a modest chance (approximately 28%) that a late-year data deterioration or isolated financial shock leads to one cut, but the balance of evidence supports no cuts over the full calendar year.
Worst case
A sharp U.S. recession or acute financial-market stress forces multiple emergency and scheduled cuts in 2026, resulting in several 25bp reductions and making the 'no cuts' outcome impossible.
More from this day
- PoliticsKalshi1y
2026: Trump's bad year?
AI62%MKT14%Edge+48Hidden GemI assess a better-than-even chance that the "bear case" for Donald Trump will materialize in 2026: legal, regulatory, and institutional pressures make a materially bad year more likely than markets currently price.
- PoliticsKalshi2y
Who will Trump pardon?
AI8%MKT46%Edge-38HypedIndependent assessment: very unlikely — I estimate an 8% chance Barron Trump receives a presidential pardon before Jan 21, 2029, because there is no present legal basis and the political cost of pardoning a child is extremely high, though not impossible if circumstances change.
- PoliticsKalshi2y
Who will be Trump's next Secretary of Labor?
AI96%MKT60%Edge+36Hidden GemKeith Sonderling is overwhelmingly likely to be the correct answer — he assumed the office on April 20, 2026 and is effectively the Department of Labor Secretary; I assign ~96% probability that he is Trump's next Secretary of Labor as defined by this market.