A video of Federal Reserve Chair Jerome Powell plays on a screen on the floor of the New York Stock Exchange, Monday, Jan. 12, 2026. (AP Photo/Richard Drew)
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The Federal Open Market Committee is expected to move interest rates lower in 2026, but not substantially. Currently the federal funds rate stands at 3.5% to 3.75%. Over the course of 2026, fixed-income markets project two interest rate cuts are the most likely outcome. FOMC members’ forecasts from Dec. 10, 2025 similarly suggesting one or two interest rate cuts are expected.
Both forecasts come with a high level of uncertainty, though one or two cuts are most likely. Still, anything between five cuts and holding rates at current levels is viewed as a possible outcome today. Overall, this does suggest that rates are moving lower in 2026, with the question being: how much lower?
Conflicting Signals In The Economic Data
Economically, the FOMC is most focused on inflation and jobs. The dual mandate of U.S. monetary policy is to maintain full employment and inflation at 2%. For now, both are slightly off target. Inflation is running a little over 2%, and job creation was soft for much of 2025, causing the unemployment rate to rise to 4.4% as reported for December 2025. That’s up from 4.0% in January 2025.
This creates a tension for monetary policy. To the extent inflation remains above target, the FOMC might want higher rates to constrain prices. However, a softer jobs market typically prompts the FOMC to cut rates in an attempt to spur job growth. For now, neither metric is too far from its goal. Inflation is only a little over target and job growth is sluggish, but without giving a clear recessionary signal. This may prompt decision-makers to be relatively cautious in moving interest rates until economic data offers a clearer signal.
How 2026 Politics Are Testing Fed Independence
2026 is also bringing unusual political pressures to the Fed. Jerome Powell is now pushing pack against apparent interference on monetary policy from the Trump administration. That’s something he was previously reluctant to do.
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In addition, later this month the Supreme Court is scheduled to hear arguments on whether Trump can fire Fed Governor Lisa Cook. That’s a case prediction markets imply the Trump administration may lose. In addition, Trump is expected to nominate a replacement Fed Chair for when Powell’s term expires. However, that nomination process may receive greater attention that usual, given Trump’s ongoing criticism of the Fed and its staff.
Stephen Miran, who Trump nominated to the FOMC in 2025 to fill the final months of Andriana Kugler’s term after her resignation, has consistently voted for lower rates. That’s in line with Trump’s policy preferences. However, Miran’s views appear an outlier that have not, so far, impacted policy.
That could change if Trump is able to replace both Powell and Cook in 2026. Still, the FOMC has 12 voting members. That means that even three Trump appointees may not swing policy substantially.
The Fed Chair must be selected from the group of sitting Fed governors. This limits Trump’s options. For example, if Trump wants an external chair such as the current slight favorite Kevin Hassett, he would likely need to replace Stephen Miran to nominate Hassett as a Fed chair and governor. Stephen Miran’s term expiring on Jan. 31, 2026, means Trump may need to make a decision on any external nomination to Fed chair within weeks, should he want to nominate an external candidate.
In light of current events, Powell may choose to remain a Fed governor until his term expires in 2028, even though it’s more customary for a Fed chair to resign from the board once their term as chair expires.
Nonetheless, despite unusual political pressure in 2025, FOMC policy in setting interest rates does not appear to have been influenced by external pressures so far.
How the Fed’s 2026 Rate Path Is Likely to Unfold
In 2026, short-term interest rates as determined by the FOMC are likely to move incrementally lower. A weakening jobs market could accelerate that process, whereas unexpected inflation, which economists would generally argue is less probable, could slow interest rate cuts.
For now, the jobs market likely remains the more uncertain part of the policy equation. In 2025, job growth was sluggish, but not sufficiently weak to present recessionary risks. For example, economic growth was estimated at a 4.3% annualized rate for Q3 2025. That’s relatively robust, despite muted job creation.