Will the Fed Cut Interest Rates in 2026?

Core PCE inflation — the Fed's preferred measure — fell to 2.6% in Q1 2026, down from a peak of 5.6% in 2022. However, 'last mile' disinflation from 3% to 2% has proven stubborn, with services inflation particularly persistent at 3.8%. The Fed has signaled it needs sustained progress toward 2% before cutting. A reading below 2.5% for two consecutive quarters would likely unlock rate cuts.

Non-farm payrolls added 142,000 jobs in March 2026, below the 12-month average of 185,000. The unemployment rate of 4.3% is above the Fed's longer-run estimate of 4.0%, providing dual-mandate justification for easing. However, average hourly earnings growth remains at 4.1% year-over-year — still above the level consistent with 2% inflation — which argues for maintaining restrictive policy.

Real GDP growth slowed to 1.5% annualized in Q4 2025, significantly below the 2.9% average of 2024. The Atlanta Fed's GDPNow model projects Q1 2026 growth at 1.2%. Sub-trend growth typically increases Fed appetite for accommodation. A reading below 1.0% would likely accelerate the cutting timeline.

Mid-term election years historically see the Fed maintain political independence, but academic research suggests the Fed is marginally more likely to cut rates in election cycles. The Fed's credibility depends on demonstrating data-dependence over political responsiveness. Fed Chair testimony has repeatedly emphasized the 2% target takes priority over political calendars.

The European Central Bank cut rates 100bps in 2025, and the Bank of England began cutting in mid-2025. The Bank of Canada has cut 150bps since June 2024. When major central banks ease, the Fed faces reduced risk of dollar depreciation from cutting, making coordination easier. DXY dollar strength above 104 also provides inflation-fighting cover for easing.

Commercial real estate stress ($1.5T in debt maturities through 2027), regional bank vulnerabilities (elevated unrealized bond losses), and corporate refinancing risk collectively increase the probability of a 'financial stability cut' separate from inflation/employment dynamics. The Fed may cut as an insurance measure to prevent cascading credit events.

“”

情報源: Federal Reserve Summary of Economic Projections (SEP), March 2026

“”

情報源: CME FedWatch Tool, April 2026

“”

情報源: Larry Summers (Harvard), April 2026

“”

情報源: BlackRock Investment Institute, Q1 2026

“”

情報源: Morgan Stanley Economic Research, March 2026