How many Fed rate cuts in 2026?
The market is pricing a very high chance that the Fed avoids any 25 bp cuts in 2026, and that looks broadly consistent with a still-restrictive policy environment and a high bar for easing. I agree the Yes outcome is the more likely result, though not quite as extreme as the current price suggests.
Analysis
The core question is whether the Fed can get through all of 2026 without delivering even one rate cut. At the current date, the market is treating that as the base case, and the pricing implies a strong belief that either inflation remains sticky enough or the labor market stays firm enough to keep the Fed on hold. Given how cautious the Fed typically is about declaring victory over inflation, a no-cut year is very plausible if incoming data remain mixed rather than decisively weak.
The main reason to support Yes is that the Fed usually needs a clear deterioration in growth, employment, or financial conditions before moving from a restrictive stance to easing. If inflation is still above target or services inflation remains persistent, policymakers may prefer to wait rather than risk a renewed inflation rebound. In that environment, even if there are months of softer data, the Committee could still decide that a cut is unnecessary, especially if prior policy restraint is still filtering through the economy.
The main reason to doubt Yes is that a full year without any cuts is a demanding outcome over a long horizon. By September, there is still plenty of time for a growth slowdown, labor-market softening, or an external shock to shift the Fed’s stance. The market only needs one 25 bp cut, including a possible emergency action, for this event to fail. That means the path is not risk-free, but absent a pronounced weakening in the economic data, the odds still favor no cuts by year-end.
Relative to the market price, I would shade slightly less confident in Yes because long-dated macro policy markets can move quickly when the data trend changes. Still, with the Fed historically slow to cut unless conditions clearly justify it, and with the current pricing already embedding a strong no-cut thesis, the most reasonable assessment is that no rate cuts in 2026 remain the most likely outcome.
Arguments
For
- Arguments for Yes: The Fed has a high bar for cutting after a period of restrictive policy, especially if inflation remains only partially contained.
- Arguments for Yes: If the economy stays near trend, policymakers can justify keeping rates unchanged for all of 2026.
Against
- Arguments against Yes: The long time horizon leaves ample room for growth or labor-market weakening to produce at least one cut.
- Arguments against Yes: One unexpected shock is enough to end the market early, and emergency easing is included in the resolution rules.
Key drivers
- Inflation staying above the Fed’s comfort zone would make policymakers reluctant to begin easing.
- A resilient labor market and stable growth would reduce pressure for any rate cut in 2026.
- The Fed’s preference for waiting for clearer evidence tends to delay policy shifts until downside risks are unmistakable.
Risk factors
- A late-year recession scare or sharper unemployment rise could force at least one cut.
- An abrupt financial-market or credit shock could trigger an emergency or rapid policy response.
- A string of softer inflation prints could make a single precautionary cut politically and economically easier to justify.
Scenarios
Best case
Inflation stays sticky but not alarming, growth remains solid, and the Fed spends the whole year holding rates steady, allowing the Yes outcome to resolve cleanly.
Most likely
The Fed remains on hold through most or all of 2026, with the balance of risks still tilted toward no cuts unless the economy deteriorates materially in the second half of the year.
Worst case
Economic data weaken sharply or a financial shock hits, leading the Fed to cut at least once before year-end and causing the market to resolve No early if the cut happens soon enough.
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