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By Hugh Cameron
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The Federal Reserve’s final monetary move of 2026 gave markets a clearer but still-incomplete vision of where interest rates might be heading next year—a year likely marked by continued concerns over inflation, fragility in the jobs market and the departure of Chairman Jerome Powell, whose latter tenure became defined by a uniquely fraught relationship with the White House.
The 25-basis-point rate cut at the December meeting landed largely in line with expectations, with nine members of the Federal Open Market Committee (FOMC) voting in favor, one opting for a larger cut, and two preferring to keep the federal funds rate steady.
In a subsequent press conference, Powell said that rates were now “in the range of neutral,” a signal to some that the Fed could be approaching the end of its cutting cycle, despite the fact that there were only two no-cut dissenters at the recent meeting.
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But Powell’s speech, littered with warnings about still-elevated inflation and the “significant downside risks” in the labor market, underscored that the Fed’s path in 2026 will ultimately hinge on how its competing mandates themselves evolve in the months ahead.
How Interest Rates Could Change in 2026?
Thanks to a moderately improved GDP growth outlook and forecasts of slower inflation, Goldman Sachs Research anticipates Fed officials will “slow the pace of easing in the first half of next year,” with chief economist Jan Hatzius predicting a pause in January but cuts in March and June for a terminal range of 3 to 3.25 percent.
And many of the conditions the Fed itself anticipates could bolster the case for more cuts in 2026 than the three enacted in 2025. In its Summary of Economic Projections, the FOMC forecast stronger growth, broadly flat unemployment and less rapid price increases, though it cautioned that “considerable uncertainty attends these projections.”
The CME FedWatch tool has placed the odds of the central bank holding its target range steady in late January at around 75 percent as of mid-December, though this majority weakens and splinters as forecasts reach further into the year.
A sizeable portion of Polymarket users have even bet on a rate hike at some point, and experts who spoke with Newsweek say caution will remain the watchword as the Fed balances inflation against a shaky labor market in 2026.
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“Consumers should expect the Fed to continue walking a careful line, easing rates only as much as the broader economy allows,” said Rodney Williams, president and co-founder of the community finance platform SoLo Funds. “If inflation cools and job stability improves, the Fed may move more decisively, but change will still be gradual.”
In his speech on December 10, Powell described the labor market as having “significant downside risks,” noting that increases in unemployment had so far been held back by a sharp decrease in the supply of workers due to both lower immigration and labor force participation.
“We're committed to 2 percent inflation, and we will deliver 2 percent inflation,” Powell said. “But it's a complicated, unusual, difficult situation where the labor market is also under pressure, where job creation may actually be negative.”
The annual inflation rate fell to 2.7 percent in the Department of Labor's latest report, down from 3 percent in September and better than the slight increase that had been anticipated.
Joshua Rowley, a Gibbs scholar and research fellow at the Mercatus Center at George Mason University, told Newsweek that a faster pace of price increases could give hawks on the FOMC some ammunition to keep rates above neutral.
And Williams added that premature easing “may sound like good news on the surface, but for millions of Americans living paycheck to paycheck, it offers only a sliver of relief.”
“On our community finance platform, we’re seeing more members than ever before requesting loans simply to cover groceries, rent, and basic bills,” he said. “That’s a sign of an economy where families are stretched thin, and a rate tweak alone can’t repair the gap.”
Powell’s Succession Adds Uncertainty to the Outlook
Rowley added that the Fed’s calculus may be impacted by the leadership transition taking place in May, when Powell’s six-year tenure comes to an end and a Donald Trump-appointed successor takes the helm.
While the president has yet to choose a replacement—bookies currently split between former Fed Governor Kevin Warsh and longtime Trump adviser Kevin Hassett—his own decidedly pro-cut tilt means, to Rowley, that the next chair “will likely champion additional cuts and move the entire committee in that direction.”
“A successor like Hassett could bring a more growth-oriented mindset to the Fed, prioritizing job creation and market momentum over strict inflation discipline,” Williams told Newsweek. “That might accelerate rate cuts, but it also raises the risk of the Fed easing before inflation is fully anchored."
This issue was raised recently by Australian economist Justin Wolfers, who warned that appointing a Trump “loyalist” could trigger an inflationary spiral reminiscent of the economic crisis that swept Turkey in recent years.
But economist Mark Gertler would like to believe that there are “constraints on what a new Fed Chairman could do,” a view reinforced by the FOMC’s majority vote system, the primus inter pares status of the central bank’s chief, as well as the economic consequences that would follow any Trump-obliging rate cuts.
“Any attempt to move rates lower for political purposes is likely to boost inflation, leading to a resounding negative reaction in financial markets,” he said. “Beyond this, failing to control inflation would be considered a sign of failure, something a new Fed chairman would surely like to avoid.”
“We have to hope sound judgment and common sense prevail in the end,” Rowley told Newsweek. “But if not, it will shed further light on the Fed’s independence, or lack thereof.”
Correction 12/23/25 5:23 a.m. ET: This article was updated to correctly attribute a quote to Rodney Williams of SoLo Funds.
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