On Wednesday, the Federal Reserve decided to cut interest rates by 25 basis points, in line with market expectations. With the Fed's final meeting of the year concluded, and several central banks around the world adopting a hawkish stance, investors' focus has shifted to the Fed's interest rate trajectory in 2026 : Can the rate-cutting cycle continue? How many rate cuts will there be next year? When will the first rate cut occur next year?
Although the Fed’s actions this week were seen as a “hawkish rate cut,” the overall tone was not as hawkish as the market had previously feared, and was seen by some Fed watchers as “lacking in hawkishness.”
Federal Reserve Chairman Jerome Powell stated at a press conference following the monetary policy meeting that interest rates are currently at a good level to cope with changes in the economic outlook. He also indicated that the labor market may be weaker than initially expected, with recent employment data being overestimated by approximately 60,000 jobs per month.
The Federal Reserve's latest dot plot shows that the median forecast from policymakers is only one 25-basis-point rate cut in 2026, the same as their September forecast. However, the Fed's monetary policy statement indicated that the "magnitude and timing" of future rate cuts will depend on changes in the economic outlook.
Despite the Federal Reserve's indication that a rate cut is unlikely in the near future, most Wall Street investment banks maintain their previous assessment that the Fed will cut rates twice next year, for a total of 50 basis points, although they disagree on the timeline for the rate cuts.
Citigroup Morgan Stanley expects the Federal Reserve to cut interest rates in January and March of next year, supported by weak labor market data. The predicted timing for interest rate cuts is January and April of next year.
The November non-farm payrolls report and inflation report, to be released next week, will be key factors influencing the Federal Reserve's policy decision at its January meeting.
JPMorgan Chase The Federal Reserve is expected to cut interest rates only once next year, in January; UBS Global Wealth Management also expects the Fed to cut rates only once next year, in the first quarter.
Goldman Sachs Wells Fargo and Barclays Strategists believe the Federal Reserve will cut interest rates twice next year, with March and June being the most likely months.
Following the Federal Reserve's interest rate decision, Goldman Sachs' chief U.S. economist, David Mericle, wrote that the most important new information gleaned from the FOMC decision and Fed Chairman Powell's comments was that the Fed believes current monthly job growth is being overstated by 60,000. The bank also noted that the Fed Chairman's dovish comments on the labor market, along with continued confidence in progress on inflation, prompted a more dovish market reaction.
It is worth noting that although the Fed's dot plot shows that policymakers expect only 25 basis points of interest rate cuts in 2026, this could change after Powell steps down in May next year.
US President Trump has frequently criticized Powell for being too slow in cutting interest rates, leading to speculation that White House economic advisor Kevin Hassett may succeed Powell. Hassett is said to favor a more aggressive rate-cutting strategy.
According to data compiled by LSEG, traders expect the Federal Reserve to cut interest rates by a cumulative total of about 55.5 basis points by the end of 2026.
The Federal Reserve's next policy meeting is scheduled for January 27-28, 2026. According to CME's FedWatch Tool, the probability of the Fed cutting interest rates by 25 basis points in January is currently 24.4%, while the probability of keeping rates unchanged is 75.6%.
A few investment banks predict no interest rate cuts next year.
On the other hand, Standard Chartered Bank The Federal Reserve maintains its stance of not cutting interest rates next year.
"Overall, we believe that (Powell's) speech boosted a broad risk appetite, but did not significantly alter the expected policy path," Standard Chartered said.
In addition, HSBC Securities It is also predicted that the Federal Reserve will keep interest rates in the 3.5%-3.75% range set on Wednesday for the next two years.
In a report dated December 10, Ryan Wang, an American economist at the firm, noted that Federal Reserve Chairman Jerome Powell was "open to the question of whether and when the FOMC will cut interest rates further next year" at the post-meeting press conference.
"We believe the FOMC will maintain the target range for the federal funds rate at 3.50%-3.75% throughout 2026 and 2027, but as the economy evolves, as in the past, we must always pay attention to the important two-way risks to this outlook."
(Article source: CLS)
