Economist Mark Zandi sees the Fed stunning with three rate of interest cuts within the first half of 2026

Labor market weakness, inflation uncertainty and political pressure will prompt the Federal Reserve to aggressively cut interest rates in early 2026, according to Mark Zandi, chief economist at Moody’s Analytics.

Although markets and Fed officials themselves expect only modest easing next year, Zandi expects the central bank to make three cuts of a quarter of a percentage point each before midyear.

“The still weak labor market, especially at the beginning of 2026, will be behind the decision to further loosen monetary policy,” the economist wrote in his recently published outlook for the coming year. “It will take longer for companies to be confident they won’t be caught off guard by changing trade and immigration policies and other threats before they start hiring again.”

“Until then, job growth will not be enough to prevent further increases in unemployment, and as long as unemployment rises, the Fed will cut interest rates,” he added.

Zandi’s forecast is at least a step above market and Fed expectations, both of which point to a slower pace of cuts.

Market prices are currently pointing to two cuts, with the first coming in April at the earliest and the second more likely in the second half of the year, probably around September, according to CME futures data expressed through the FedWatch indicator system.

Fed policymakers have an even more cautious outlook.

The grid of expectations from individual central bank officials only points to a full-year decline, according to an update provided in early December. Minutes from that meeting indicated the cut was a close call, with officials expressing the likelihood of further cuts, but only at a measured pace.

But Zandi believes the confluence of these factors will cause the Fed to respond more quickly. A wild card: the potential for President Donald Trump to reshape the central bank hierarchy.

As things stand, three of the seven Fed governors are Trump appointees: Christopher Waller, Michelle Bowman and Stephen Miran. With Miran’s term expiring in January, Trump is likely to appoint another loyalist to the post. From then on, Chairman Jerome Powell’s term at the helm ends in May, although his term as governor ends in early 2028. In addition, the president is trying to remove Governor Lisa Cook, although the courts have so far blocked him.

This increases the likelihood that the president, a staunch supporter of lower interest rates, will try to exert his will on the Federal Open Market Committee, which sets interest rates.

“Trump will also push for lower interest rates. The Federal Reserve’s independence will steadily erode as the President appoints more members to the Federal Open Market Committee, including the Fed Chair in May,” Zandi wrote. “With the congressional midterm elections approaching, political pressure on the Fed to further cut interest rates to support economic growth is likely to increase.”

The FOMC meets again on January 27th and 28th. According to CME, the probability of a cut at this meeting is only 13.8% based on market prices.