Mark Zandi, Chief Economist at Moody's Analytics, stated that a weakening labor market, uncertain inflation prospects, and political pressures may compel the Federal Reserve to adopt more aggressive interest rate cuts in early 2026. Although current market expectations and Fed officials themselves anticipate a relatively moderate pace of policy easing over the next year, Zandi believes the Fed could implement three 25-basis-point rate cuts before mid-2026. In his recently published annual outlook, he wrote that the core reason driving further monetary policy easing will be the still-sluggish labor market at the beginning of 2026. Zandi pointed out that businesses still need time to gain confidence that they will not be "caught off guard" by changes in trade and immigration policies, as well as other potential risks, and before that happens, a significant recovery in hiring activity will be difficult. "Until then, job growth will be insufficient to prevent the unemployment rate from continuing to rise, and as long as the unemployment rate is still increasing, the Fed will choose to cut rates." This assessment is significantly ahead of both market and official expectations. According to CME futures data reflected through the CME FedWatch Tool, the market is currently pricing in only two potential rate cuts for 2026, with the first unlikely until after April, and the second more probable in the second half of the year, around September. In contrast, the internal stance of the Fed is more cautious. The updated interest rate path "dot plot" released by the central bank earlier in December showed that expectations for just one rate cut for the entire year were predominant among officials. Meeting minutes also revealed that the decision on whether to cut rates at that meeting was a "close call," and although officials acknowledged that future rate cuts remained possible, the pace would be quite restrained. However, Zandi believes that the convergence of multiple factors could force the Fed to act more quickly, with one significant variable stemming from the political sphere: the potential reshaping of the Fed's personnel structure by US President Donald Trump. Among the current seven Fed Governors, three have already been appointed by Trump; with Governor Michelle Bowman's term expiring in January, Trump is expected to nominate another candidate with similar views. Furthermore, current Chair Jerome Powell's term as Chair expires in May (his term as a Governor continues until early 2028), and the President is also attempting to push for the removal of Governor Lisa Cook, although this is currently blocked by the courts. Zandi believes these changes will increase the likelihood of the President exerting pressure on the Federal Open Market Committee (FOMC). He stated: "Trump has consistently advocated for lower interest rates. As the President appoints more FOMC members and appoints a new Fed Chair in May, the central bank's independence will gradually erode." With mid-term Congressional elections approaching, political pressure for further rate cuts to support economic growth is likely to intensify. The Fed's next policy meeting is scheduled for January 27-28. According to CME data, the market currently assigns only about a 13.8% probability of a rate cut at that meeting.
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