Powell’s Fed Sees Cuts Through 2025. But All Bets Are Off in 2026.

Next year will see a new Fed chair after Jerome Powell’s term ends, and if governor Lisa Cook’s firing is upheld, Trump appointees would have a majority on the seven-member Fed Board. (Kent Nishimura/Bloomberg)

The path is clear, at least through the end of 2025. After that, less so.

The Federal Reserve ratified the markets’ expectations this past week by trimming its federal-funds target range a quarter percentage point, to 4%-4.25%, while projecting two more similar cuts through December. But that’s where predictability ends.

By 2026, there could be significant changes among the Fed’s policymakers. And even among the current members of the Board of Governors and the district presidents, there’s an unusually wide range of opinions about the future course of interest rates.

For now, however, there is little ambiguity. Powell characterized this past week’s easing as an insurance policy against what policymakers see as the main risk to the economy—a deceleration in private job growth. So the Fed cut once and penciled in two more reductions by December even as the Federal Open Market Committee’s new Summary of Economic Projections, or SEP, showed higher guesstimates for gross domestic product and core inflation for next year and a lower projection for unemployment.

More to the point for the markets, the Fed is easing with gold, cryptocurrencies, stocks, and corporate credit at record high prices, notes Bank of America’s strategy team led by Michael Hartnett. Tariff cuts, tax cuts, rate cuts add up to “run-it-hot” U.S. policies, which point to an “implicit guarantee economy & stocks [are] ‘too big to fail’,” they write in a client note on Friday.

This harkens back to the risk management modus operandi of former Fed Chairman Alan Greenspan during the 1990s and 2000s, says Paul Ashworth, chief North America economist at Capital Economics. The Maestro eased during the 1998 Russian debt crisis, a time the U.S. economy was entering the late stage of the previous technology boom, stoking the dot-com bubble at the turn of the century.

The Fed further risks a replay from an era even farther back, the Go-Go market of the groovy late 1960s, observes Michael Darda, chief economist and macrostrategist at Roth Capital Partners. As I described this history last year, the Fed eased in the face of an apparent credit crunch and amid the expansionary “guns and butter” fiscal policy of the Vietnam War era. That augured the inflation of the 1970s.

Darda notes that also was the last time an inverted yield curve (with short-term rates above intermediate- and longer-term bond yields) didn’t signal a future recession. This once-redoubtable indicator erroneously forecast a downturn.

Peering ahead, however, the outlook is considerably less clear. The SEP median projection for the rest of 2025 is for two more quarter-point cuts, reflecting nine of the 17 FOMC members’ guesses. There were also two looking for one cut and six looking for no further cuts. Finally, there were two outliers: one who would prefer a quarter-point hike, reversing the latest cut, while another opted for more than a full-point slash to under 3%. Stephen Miran, the new Fed Board member (and still chair of the White House Council of Economic Advisers) on Friday owned up to that being his call.

More important, the median end-of-2026 call for just one more quarter-point trim (to a range of 3.25%-3.5%) obscures a wide dispersion of opinions. And that’s among the current FOMC, which could see considerable turnover.

Next year will see a new Fed chair, and if governor Lisa Cook’s firing is upheld, Trump appointees would have a majority on the seven-member Fed Board (and five seats, assuming Powell vacates his seat as governor when his term as chair expires), along with Christopher Waller and Michelle Bowman, who were nominated in the president’s previous term. Then there’s the question of renewing employment contracts of the 12 Fed district presidents next February, which previously had been automatic. Precedent means nothing anymore.

Politics aside, with an accommodative monetary policy in a growing economy, FOMO—fear of missing out—once again is the market’s leitmotif, say Evercore ISI strategists led by Julian Emanuel. Money managers don’t want to be left behind in a stock market in which all the major indexes—the S&P 500, the Nasdaq Composite, the Dow Jones Industrial Average, and now the small-cap Russell 2000 —are hitting highs. Evercore’s advice: Hedge with cheap put options on the Invesco QQQ Trust exchange-traded fund tracking the Nasdaq 100 in order to buy in the event of seasonal weakness, not sell into it. That much is clear.

Write to Randall W. Forsyth at randall.forsyth@barrons.com