Powell's remarks have signaled a potential pause in rate cuts as early as January next year, but his hawkish stance may have been overstated. Analysts believe that the Fed’s priority remains stabilizing the labor market, and three more rate cuts are still expected next year.
The Federal Reserve cut interest rates as expected in December, lowering the federal funds target rate to a range of 3.5%-3.75%. Unsurprisingly, this decision sparked controversy: Regional Fed Presidents Austan Goolsbee and Jeffrey Schmid voted against the move, advocating for unchanged rates, while Governor Stephen Miran supported a more aggressive 50-basis-point cut.
The overall tone of this meeting leaned hawkish, but perhaps less so than market expectations. Federal Reserve Chair Powell stated that the federal funds rate “is within the broad range of estimates for its neutral level,” and that “the Federal Open Market Committee (FOMC) is well-prepared to wait and observe economic developments.”
The Monetary Policy Radar team at the Financial Times believes that Powell’s remarks confirmed their expectation that the Fed would maintain the current interest rate level at its next meeting at the end of January next year.
However, the team cautioned against overinterpreting the hawkish signals from the December meeting. The Fed had already made clear when it first cut rates this year that it would prioritize stabilizing the labor market rather than worrying about tariff-induced price increases, which may not be temporary.
Even after careful deliberation in the weeks prior, the Fed proceeded with another rate cut in December, indicating that this policy response mechanism is still in effect. The team believes that labor market weakness may persist into next year, and the Fed could be inclined to act again early next year by implementing another 25-basis-point cut in March. This view is further reinforced by the recent pullback in the Consumer Price Index (CPI) inflation data, even though the quality of the data fell short of standard levels.
The team expects labor market weakness to continue into the second half of next year, with the Fed gradually cutting rates on a quarterly basis, reducing the rate to a range of 3%-3.25% by the June meeting. They also maintain their forecast for a third rate cut by the Federal Reserve in the second half of 2026.
Given the widespread expectation that the U.S. economy will remain strong next year, the risks associated with the third rate cut remain elevated. However, with a new Fed Chair taking office in May, the team predicts that the policy response mechanism will become more dovish, forming the basis for their forecast — which is more aggressive than the two rate cuts currently priced into the futures market.
Below is the Financial Times Monetary Policy Radar team’s outlook for the Federal Reserve’s future policy meetings.
January 2026
Following the rate cut in December, the influence of the hawkish faction will strengthen, with an increasing number of FOMC members indicating reluctance to support a fourth consecutive rate cut. As a result, the Federal Reserve is expected to keep interest rates unchanged in January next year.
By January, the voting composition will change due to the rotation of regional Fed presidents, but this is unlikely to have a significant impact on the trajectory of interest rates. Hawkish dissenters Schmid and Goolsbee will be succeeded by Beth Hammack of the Cleveland Fed and Lorie Logan of the Dallas Fed, who hold similar positions. Relatively centrist members Neel Kashkari and Anna Paulson will also gain voting rights in 2026.
Interest Rate Level | Probability | Scenario | Analysis |
|---|---|---|---|
3.75%-4% | 1% | High Interest Rate Scenario | The Federal Reserve shifts to raising interest rates in response to inflationary pressures. |
3.5%-3.75% | 70% | Baseline Scenario | The Federal Reserve pauses action after a rate cut in December. |
3%-3.5% | 29% | Low Interest Rate Scenario | A significant decline in economic activity prompts the Federal Reserve to implement a fourth consecutive rate cut. |
March 2026
The current data presents a mixed picture of the U.S. economy. Employment figures indicate a slight rise in the unemployment rate in November, likely a temporary effect of the government shutdown. If subsequent data confirms this impact as transitory, the unemployment rate is expected to revert. However, the team believes that the unemployment rate will remain sufficiently elevated to keep the Federal Open Market Committee (FOMC) focused on safeguarding the labor market, making another interest rate cut highly probable.
The latest inflation data appears to support this view: the year-over-year growth rate of the overall Consumer Price Index (CPI) in November fell to 2.7%, significantly below market expectations and the latest in a series of unexpectedly weak inflation readings.
Interest Rate Level | Probability | Scenario | Interpretation |
|---|---|---|---|
3.5%-3.75% | 30% | High-Interest-Rate Scenario | Persistently high inflation prompts the Federal Reserve to maintain rates unchanged. |
3.25%-3.5% | 55% | Baseline Scenario | Ongoing weakness in the labor market leads to another Federal Reserve rate cut. |
3%-3.25% | 15% | Low-Interest-Rate Scenario | Rising unemployment prompts the Federal Reserve to implement its fifth consecutive rate cut. |
June 2026
The team believes that the risk of inflation exceeding the target remains higher than the FOMC's estimates. However, the committee appears willing to accept this risk and adopt a tolerant stance toward high inflation. Therefore, barring any adverse inflation surprises or an unexpectedly strong labor market, the team still expects two rate cuts in the first half of next year, bringing the policy rate to what the Federal Reserve considers a neutral range.
The June 2026 meeting will also be the first session chaired by the new Federal Reserve Chair. In the absence of clarity on who the new chair will be, the team’s forecasts are based on the assumption that the FOMC’s decision-making and policy response mechanisms will remain primarily data-driven, but with a more pronounced dovish bias.
However, it is worth noting that Trump may appoint a new chair who is willing to follow directives from the White House in formulating policies. If this occurs, the June 2026 meeting could mark the beginning of a longer-than-expected easing cycle.
Interest rate level | Probability | Scenario | Analysis |
|---|---|---|---|
3.25%-3.75% | 35% | High-interest-rate scenario | Persistently high inflation forces the Federal Reserve to slow the pace of rate cuts |
3%-3.25% | 45% | Baseline scenario | The Federal Reserve continues to cut interest rates on a quarterly basis |
2.25%-3% | 10% | Low-interest-rate scenario | Economic weakness forces the Federal Reserve to shift its policy stance towards easing |
Note: The sum of probabilities does not reach 100%, reflecting the possibility that interest rates may fall outside the specified range above | |||
December 2026
Under the baseline scenario, the team still expects the FOMC to cut rates once more in the second half of 2026, lowering the federal funds rate to a range of 2.75%-3.25% by the end of the year.
This forecast is more dovish than the median projection of rate-setters, which points to a "3.25%-3.5% benchmark rate by the end of 2026," but it aligns with their core view that the Federal Reserve is moving toward a neutral rate faster than before.
This is not necessarily the correct policy path for the Federal Reserve, as the team believes that tariffs could pose a real risk of inflation persistently overshooting its target, which would force the Fed to proceed more cautiously with its easing policy. This also explains why they assign a higher probability to the scenario where "the Fed cuts rates fewer times and maintains the policy rate above the neutral level for longer to counter import-driven inflationary pressures."
The most plausible scenario for the Fed to accelerate rate cuts, according to the team, is one where economic policy uncertainty related to Trump weakens consumer confidence, thereby dampening demand. However, this scenario has a relatively low overall likelihood.
Interest rate levels | Probability | Scenario | Interpretation |
|---|---|---|---|
3.25%-3.75% | 35% | High-interest-rate scenario | Inflationary policy necessitates maintaining high interest rates or raising rates |
2.75%-3.25% | 40% | Baseline scenario | The Federal Reserve continues on an accommodative path, moving toward a neutral or slightly below-neutral interest rate level |
2%-2.75% | 10% | Low-interest-rate scenario | Weakness in the real economy leads to faster rate cuts or a downward revision of the estimated neutral interest rate |
Note: The sum of probabilities does not reach 100%, reflecting the possibility that interest rates may fall outside the specified ranges above | |||
June 2027
The team believes that by mid-2027, the federal funds rate will gradually approach the neutral level. If the Federal Reserve turns dovish as expected in 2026, it is projected to implement 1-2 rate hikes in the following year.
Interest rate level | Probability | Scenario | Analysis |
|---|---|---|---|
3.5%-4.25% | 30% | High-interest-rate scenario | Tariffs cause inflation to significantly exceed targets, forcing the Federal Reserve to remain cautious |
3%-3.5% | 35% | Baseline scenario | After reducing interest rates below neutral in 2026, the Federal Reserve gradually raises the benchmark interest rate back to a neutral level |
2.25%-3% | 15% | Low-interest-rate scenario | Political pressures or weak demand force the Federal Reserve to maintain an accommodative stance |
Note: The total probabilities do not add up to 100%, reflecting the possibility that interest rates may fall outside the specified ranges above | |||
December 2027
The team believes that by the end of 2027, the federal funds rate will return to near-neutral levels. If the Federal Reserve turns dovish in 2026 as we expect, it is projected to implement 1-2 rate hikes in the following year.
Interest rate level | Probability | Scenario | Interpretation |
|---|---|---|---|
3.5%-4.25% | 30% | High interest rate scenario | Tariffs cause inflation to far exceed targets, forcing the Federal Reserve to remain cautious |
3%-3.5% | 35% | Baseline scenario | After reducing interest rates below neutral in 2026, the Federal Reserve gradually raises the benchmark interest rate back to a neutral level |
2.25%-3% | 15% | Low interest rate scenario | Political pressures or weak demand force the Federal Reserve to maintain an accommodative stance |
Note: The sum of probabilities does not reach 100%, reflecting the possibility that interest rates may fall outside the specified ranges above | |||
Long-term outlook
The team's long-term interest rate forecast remains unchanged, with the neutral rate expected to be approximately 3.25%.
Interest rate level | Probability | Scenario | Analysis |
|---|---|---|---|
4%-5% | 20% | High interest rate scenario | Strong growth or declining confidence in U.S. public finances necessitates a higher neutral rate |
2.5%-4% | 40% | Baseline scenario | Interest rates converge toward levels close to the long-term trend growth rate of the U.S. economy plus inflation |
1.5%-2.5% | 20% | Low interest rate scenario | Weak growth leads to limited savings channels, driving long-term interest rates to lower levels |
Note: The sum of probabilities does not reach 100%, reflecting the possibility that interest rates may fall outside the specified ranges above | |||
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