Jerome Powell, chairman of the US Federal Reserve, during the Hoover Institution’s George P. Shultz Memorial Lecture Series in Stanford, California, US, on Monday, Dec. 1, 2025. The Federal Reserve said it was monitoring community and regional banks’ commercial real estate loan portfolios amid concerns over “elevated interest rates, tighter underwriting standards, and lower commercial property values.” Photographer: Jason Henry/Bloomberg
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The Federal Open Market Committee has cut interest rates at each of the last three meetings of 2025. On December 10, the Federal Funds rate was cut to 3.5%-3.75%. However, Federal Reserve Chair Jerome Powell suggested that interest rates may now be at a more neutral level during his December 10 press conference. There’s a lot of economic data to come before the FOMC holds its first meeting of 2026 on January 27-28, particularly as the 2025 government shutdown has delayed or eliminated some statistical economic reporting. Still, the likely direction for interest rates is potentially lower over time, but the CME’s FedWatch Tool currently gives just a 1 in 4 chance of a January cut.
Balance Of Risks
For now, Powell suggested there is a broad balance between inflation being above target and the job market showing potential downside risks. For example, the FOMC’s December statement noted that, “Inflation has moved up since earlier in the year and remains somewhat elevated.” But also that, “The Committee is attentive to the risks to both sides of its dual mandate and judges that downside risks to employment rose in recent months”
This sense of balance of risks is also apparent in the voting within the FOMC where two policymakers (Schmid and Goolsbee) voted to hold rates at current levels and one policymaker (Miran) preferred to lower interest rate further than the FOMC’s ultimately decided. Notably for 2026 both Jeffrey Schmid and Austan Goolsbee will rotate from voting roles on the FOMC, which has the potential to make the voting membership perhaps more dovish depending on the policy perspectives of their replacements.
Non-Economic Factors In Determining Interest Rates In 2026
Beyond the fate of the economy, other factors may determine interest rates in 2026. These include the Supreme Court ruling on certain of President Trump’s tariffs. Tariffs are believed to have elevated prices for various goods in 2025. As such a reversal of tariffs could bring inflation lower in 2026, depending on how the Supreme Court rules and how the Trump administration reacts. Cooling inflation might tend towards slightly higher lower rates.
In addition, the Supreme Court will also rule on whether Fed Governor Lisa Cook can be fired by President Trump. A potential further change is that President Trump is expected to nominate a new Fed Chair in the coming months, with Kevin Hassett the current favorite to succeed Powell according to prediction markets. That transition is expected in May 2026.
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What To Expect
The FOMC always notes that its decisions are data dependent, but that may be especially true ahead of the January meeting given reporting delays caused by the government shutdown.
The delayed jobs report for November 2025 will be released on December 19, then the jobs report for December will follow on January 9, 2026. Those two updates on the job market unusually close together will help inform the FOMC, given the current debate about how much of a risk apparent slowing job growth represents to the U.S. economy. If the job market weakens more than expected, further interest rate cuts are perhaps more likely. If the jobs numbers are better than expected, the FOMC may tend to hold rates closer to current levels for longer. Of course, inflation will be watched too, with the current view that tariff-related goods inflation will have mostly been passed through to prices by early 2026 and represents perhaps a one-time increase in the price level.
After a string of cuts, Powell’s message was that a cut in January is perhaps less likely, a view that fixed income markets appear to share.