Jerome Powell is approaching the end of his eight-year term as Federal Reserve Chair at a moment when the US central bank faces heightened political pressure and growing disagreement among policymakers over the appropriate path for monetary policy. The question now is how Powell’s final stretch in office will unfold against this complex backdrop.
The labour market continues to operate slightly below full employment. Private-sector hiring has stalled in recent months, hovering close to zero, and although the unemployment rate edged lower in December, it remains above most estimates of its long-run equilibrium level. These conditions suggest that labour market slack has not yet been fully absorbed.
Inflation trends, however, have become more reassuring. Core CPI slowed to 2.6% year-over-year in December, down notably from 3.1% in August. Some of this improvement may reflect temporary distortions related to government shutdown effects, which could be suppressing inflation by roughly a tenth of a percentage point. In contrast, the Fed’s preferred inflation gauge, the PCE deflator, likely shows slightly less progress. Even so, the broader trajectory for underlying inflation as the economy enters 2026 appears clearly downward.
Against this backdrop, there is still room for the Federal Open Market Committee to gradually guide interest rates closer to a neutral setting. Our baseline view remains unchanged, with two quarter-point rate cuts expected in March and June, followed by an extended pause that would leave the federal funds rate in a 3.00% to 3.25% range.
That said, the opportunity for further easing is narrowing. Fiscal support from the One Big Beautiful Bill Act is likely to start feeding into economic activity by late spring or early summer. In addition, risks surrounding US tariff policy now appear tilted toward potential reductions, which could provide another boost to growth later in the year. The delayed effects of the 75 basis points of rate cuts delivered over the past three months should also begin to lend modest support to economic momentum.
If incoming labour market and inflation data surprise to the upside in the near term, Powell and his colleagues may opt to hold rates steady and pass the baton to the next Fed Chair without making further adjustments. That successor could face resistance from a committee that has already been under mounting pressure from the Trump administration. Expectations for strengthening growth through the spring and summer would further reinforce the case for a prolonged pause.
For now, we maintain our forecast, but the balance of risks around the policy outlook is shifting. We see a growing likelihood that rate cuts could come later than expected, or prove fewer in number, compared with our central scenario.
