How many Fed rate cuts in 2026?
I estimate an 87% chance that the Fed makes no rate cuts in 2026. The latest inflation and labor data still justify a restrictive stance, and recent Fed communications lean more toward holding or even hiking than easing.
Analysis
The balance of evidence still points strongly toward no Fed rate cuts this year. The Fed held the target range at 3.50% to 3.75% at its June 16-17 meeting, and the latest June CPI report showed headline inflation at 3.5% year over year and core CPI at 2.6%, which is better than the recent peaks but still not consistent with a comfortable path to cuts. The June jobs report also did not create an urgent need for easing: payroll growth was weak at 57,000, but unemployment remained 4.2%, which is more consistent with a cooling but still functioning labor market than a recessionary break.
The Fed’s own communication has turned meaningfully more hawkish. In the June minutes, officials described a serious debate about inflation persistence, and the summary materials showed a committee that has moved away from earlier expectations of cuts. The Desk survey attached to the minutes implied no change in the target range through the beginning of 2027, with only one cut appearing in the second quarter of next year. Chairman Warsh’s testimony this week reinforced that the Committee is focused on price stability and that it is in no hurry to provide rate relief. That combination makes a 2026 cut look like the exception rather than the base case.
Market pricing has shifted in the same direction, even after the softer June CPI release. Traders have backed away from any near-term cut narrative and are mainly debating whether the Fed simply holds or eventually hikes later in the year. Because this market only requires that no cut occur at all, the hurdle is much easier than predicting a hike. To get a No outcome, the economy would need to soften enough, and fast enough, to overcome still-elevated inflation, a divided Committee, and a policy mindset that is currently biased toward caution. That is possible, but not the most likely path from here.
Arguments
For
- Arguments for Yes: Inflation has cooled from the spring spike, but it is still too high for the Fed to feel pressure to cut in 2026.
- Arguments for Yes: The labor market remains resilient enough that policymakers can justify staying on hold for the rest of the year.
Against
- Arguments against Yes: A further drop in inflation or a weaker jobs trend could reopen the door to one 25 bps cut late in 2026.
- Arguments against Yes: Market conditions and Fed rhetoric could pivot quickly if growth slows, making a cut possible before year-end.
Key drivers
- The Fed is still prioritizing inflation control over preemptive easing.
- Only four scheduled FOMC meetings remain after mid-July, leaving limited time for a full easing cycle to start.
- Recent official guidance and minutes suggest hold-or-hike bias rather than a cut bias.
Risk factors
- A sharper slowdown in payrolls or a rise in unemployment could force the Fed to cut.
- A sustained, broad-based decline in inflation could give the Committee room to ease before December.
- Geopolitical or energy shocks could keep the Fed on hold, but a sudden reversal in those shocks could shift the debate toward cuts.
Scenarios
Best case
Inflation continues to cool, growth remains solid, and the Fed keeps rates unchanged or even tightens later in the year, making no cuts the clear outcome.
Most likely
The Fed holds steady through year-end, with the dominant debate centered on when it might cut in 2027 rather than whether it will cut in 2026.
Worst case
The labor market weakens materially and inflation falls enough that the Fed delivers one late-2026 cut, breaking the no-cuts thesis.
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