The Fed Just Cut Rates Again. Here’s What’s Ahead for 2026

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1:02Bloomberg Audio Studios. Podcasts. Radio. News. Good afternoon. My colleagues and I remain squarely focused on achieving our dual mandate goals of maximum employment and stable prices. On Wednesday, the Federal Open Market Committee cut rates by 25 basis points. Today, the Federal Open Market Committee decided to lower our policy interest rate by a quarter percentage point. It was the scenario a lot of close watchers of the Federal Reserve expected, including Anna Wong, the chief U.S. economist for Bloomberg Economics. I think the takeaway is that Chair Powell really believed that the economy needs another cut.

1:45Anna says that even though people saw the cut coming, it wasn't a foregone conclusion. We knew going in that the FOMC is very divided. We have 12 regional Fed presidents and more than half of them think that holding the rates constant is the wiser course of action. And we see that in a dot plot with all these silent dissents. We know that the majority, basically, of the FOMC committee would have preferred holding rates constant. So the person that really changed this course of action or pushed for this 25 basis point cut is Powell. This could be the last Federal Reserve meeting where Powell will have that kind of sway.

2:32Here's President Trump hinting at the next Fed chair nominee in a press conference from early December. I guess a potential Fed chair is here too. I don't know. Are we allowed to say that? Potential. Trump has said that he and Treasury Secretary Scott Besant will name the next Federal Reserve chair by early next year. That person will replace Powell when his term is up in May. And recently, Kevin Hassett has emerged as the frontrunner. He currently serves as director on Trump's Council of Economic Advisors. He's a respected person, that I can tell you. Thank you, Kevin.

3:10I'm Sarah Holder, and this is The Big Take from Bloomberg News. Today on the show, what the Fed's latest decision says about the state of the economy and the state of the Fed itself.

3:28At today's meeting, the committee decided to lower the target range for the federal funds rate by a quarter percentage point to three and a half to three and three quarters percent. In the near term, risks to inflation are tilted to the upside and risks to employment to the downside. A challenging situation. Anna, what will this cut mean for the economy? How will it affect the labor market, affect inflation? What could we see from here? So the transmission of monetary policy is both short and long at the same time. It is very fast in supporting the economy in a couple sectors. So in industrial production, it takes only two to three months before the rate cut will start causing some turnaround.

4:15Part of the economy that reacts very quickly to rate cuts is the housing market. And this fall so far, the housing market has been quite weak. And so that should also start turning around within the next six months. So I think a cut will only pour a little bit of fuel onto the stock market. We are going to see easier financial conditions. And as of now, financial conditions is already providing about a 0.9 percentage point GDP support in the next 12 months. Crucially, what the Fed's signal for the path of rate cuts next year will decide whether, you know, the easy financial conditions will add even more to the economy, more than 0.9 percentage point as it shows now next year.

5:03This 25 basis point cut follows two other small cuts at the last two Fed meetings. What do these incremental reductions say about the strategy the Fed is currently pursuing and might moving forward? I think at each point of these 25 basis point cut, the Fed thought, OK, I'm just going to do one and then we'll wait a bit. But what happened is that after each one of them, the incoming data keep telling them that they need to do more. And so even after this 25 basis point cut, we are still 75 basis point to 100 basis point away from the neutral. I mean, it depends on who you ask. The neutral could be 2.75 % or 3%.

5:47So there's actually room to cut for another three to four 25 basis point cuts. So it could be that the Fed may return to that pattern we have seen in the last two meetings, is that even though they're projecting that they will only do one or two more cut next year, they would feel the need to do more as the data comes in in the next few months. There was so much discussion during the government shutdown about how the government data blackout would impact the Fed's ability to gauge both inflation and employment. Did that ultimately impact their ability to assess the health of the economy right now?

6:25How much did that data disruption factor into what we're seeing today? It definitely did. So BLS just announced a series of revision to their data release schedule. And it looks like that for a whole slew of indicators, there will never be an October number. Wow. So it's not just the unemployment rate and not just for the CPI, but also export, import prices, PPI, all sorts of data. there's not going to be ever an October number. And how significant is that? How big of a black hole of knowledge loss is that? Well, so for example, had the schedule been normal, had there not been a government shutdown, then the Fed would have have the November non-farm payroll data before this December meeting.

7:16They would have have a couple CPI, PPI data before this meeting. And they have none of that. So we are going to be getting the non-farm payrolls data next week, which is abnormal, right? And it would be a dual payroll data release. So we will get both October and November numbers. They are going into this December cut with more faith in Powell's read of the economy. He really cares about the Beige Book. The Beige Book traditionally has been a very good barometer of the labor market. And the Beige Book has suggested that, in fact, maybe about half of the districts are seen flat to declining employment.

8:01And that was also the same source that shaped his view last fall in September of 2024, where he pushed for a 50 basis point cut. So I think that his takeaway of the economy is that the labor market needs support from monetary policy. So we know what data they didn't have, but what data did they have and what was that telling them? They rely more than usual on the ADP data. And the ADP data had been very weak. And I think the Fed staff has a very good grasp of what the ADP data show and does not show and where the biases are. But I think generally, the ADP data is also consistent with all these other private sector payrolls, data like Gusto, Intuit, Reveglio.

8:56There's now a whole bunch of firms that provide estimates for NFP. And all those said that negative job growth happened in November. So that should be concerning, right? especially if it agrees with the signal from the Beige Book, which is also that half of the districts are seeing flat to declining job growth. We didn't see consensus today, right? We saw two officials dissent in favor of holding rates. We saw Stephen Myron dissent in favor of a 50 basis point cut. Is this a departure from the norm we've seen under Powell? Is it the end of an era? It probably is an end of an era because I think every time a new Fed chair enters, He needs to build trust and credibility and a sense of camaraderie with the rest of the FOMC.

9:45Alan Greenspan had a lot of soft power in the 1990s. But when you read the historical transcript, you could see that, in fact, there were a lot of disagreement. Disagreement behind closed doors are very common. Where it differs is whether these guys also openly dissent. because open dissension is a sign that the Fed chairman is not able to exercise the soft power. We talk about the other challenges facing the next Fed chair and how Kevin Hassett might approach them if chosen to replace Powell after the break.

10:33President Trump and Treasury Secretary Scott Besson are expected to announce a pick for the next Fed chair by early next year. That person, if confirmed by the Senate, will replace Jerome Powell when his term finishes in May. Kevin Hassett, one of Trump's top economic advisers, has emerged as the frontrunner. And Bloomberg Economics chief U.S. economist Anna Wong is very familiar with Kevin Hassett's work. Anna, you know Hassett personally. You both worked on the Council of Economic Advisors during the first Trump term, and you also spoke with him last month at the Bloomberg Insights and Innovation Summit in Washington, D.C.

11:11So what should we know about Hassett's qualifications for the job? What do you think Trump sees in him? Well, in terms of his on paper qualification is very similar to four other Fed chairs. So Janet Yellen, Bernanke, Alan Greenspan were former CEA chairman. So that's quite similar. And Arthur Burns also happened to be a CEA chairman. But I think people's concern is that Kevin Hassett has been NEC director role for most of this year. And the job description of the NEC director is a little bit like a salesman. You have to sell the administration's policy. So in terms of how the world understand him is they see it through his TV interviews where he's basically selling the administration policies.

12:04And that's not the job of the Fed chairman. The Fed chairman is supposed to not sell anything. And you should come across as a person who's a consensus builder and talk only about data. The other side of Kevin, the off-camera side, is that he's actually very sensitive to data. And he's very good at tackling questions. When you work in the policy world, you get these various stakeholders around the White House and the Congress constantly bombarding you with economic questions like what happened with this and that and that. So he's actually very well-rounded on all sorts of aspects of the economy.

12:47And I think that gives him an advantage in how to push the Fed staff in incorporating many things that typically Fed staff do not incorporate. For example, deregulation, right? How does the Fed staff incorporate that? I think barely. Because number one, they barely know what's going on with deregulation policies. And number two, as a result, they don't really have a strong view of how it should be baked in. Kevin has a very strong view of where that will enter. Basically, it should be lowering prices in it. And second of all, the fiscal policy, the impact of one big beautiful bill. So at the end of the day, Kevin has it as a tax economist.

13:29He is most passionate about tax policy. He helped design the Tax Cuts and Drops Act, the one big beautiful bill. And the way that Fed staff have traditionally incorporated the economic impacts of these tax policies, they're very skeptical of the growth-enhancing impact of tax policy. And in economists' term, you basically use a fiscal multiplier to decide how much extra growth you can get from cutting corporate tax rate. And I think my sense is that the Fed staff multiply estimate is at least maybe only one-fourth of what Kevin Hassett believes. I want to talk about some of those TV appearances because I think they're kind of telling.

14:12You know, I've heard Hassett praise Powell. He was on CNBC earlier this week and said that the Fed needs to follow the data and not prematurely promise future rate cuts, for example. It's not exactly in line with Trump's thinking or how Trump has been talking about the economy and the Fed and Jerome Powell and interest rates. So how are you reading Hassett's public remarks right now? Yeah. I mean, I think you notice what I've noticed too, which is that it seems like the way he talk about Fed rate cuts has shifted in the last five days or so. And he is moving towards a more Fed chairman-like way of talking about things, to be cautious.

14:51And I think you have heard in my interview with him where he said, I would not talk about whether inflation is transitory. He also recently in public remarks, he declined to say what Fed funds rate should look like in six months because he's not going to go out of a limp to make a bold claim on what inflation is and is not and what Fed cuts would be. And I thought that's a really new side of communication from him because we have not seen that prior this week. So I think he is transitioning to conducting himself more like a Fed chairman. Well, there have been concerns about the future of Fed independence under a Trump-appointed Fed chair.

15:33What do we know about how Hassett would approach or has approached the question of Fed independence? So I think we should delineate the difference between Fed independence and Fed accountability. because if you read and listen to Kevin Hassett, but also Steve Myron, they are both strong believer of Fed independence. They have supported it. They've cited academic research on Fed independence. But what differs in their view of Fed independence that the Fed also needs to have accountability. And from their perspective, they think that the Fed really has dropped the ball on inflation in the last four years.

16:13And also they perceived the 50 basis point cut last fall as politically motivated. And traditionally, the Fed institution, the staff is also left leaning. So I think that fuels some suspicion from the administration that this institution is, you know, full of deep state actors who's trying to subvert what they're trying to do. So that's why they feel like they need to send their own person in there, that type of thing. In terms of risk for true Fed independence destruction, where I would be worried if I start seeing flimsy reasons for removing existing regional Fed presidents. Because when we look at the current composition of FOMC, it is absolutely true that Trump has a regional Fed problem.

17:05So of the 12 regional Fed presidents, I counted that nine of them are hawks. and they are young hawks. They are going to be around until 2030s. And the three doves, two of them are retiring in 2028. So these are old doves. I don't see any legal means for removing current Fed presidents unless they pull a bill of pulte on the regional Fed, find some trading scandals. It's kind of very easy to ding people for improper filing and that sort of stuff, Like they did with Lisa Cook. With Lisa Cook. And while it's true that as the chief regulator of banks and the financial market, you should be squeaky clean, it's also, it's very obvious what is the motivation behind these investigations and the optics also matter for independence.

18:02So I think if Scott Besson pushes through what he said he wants to do, which is that to from now on apply a three year residency requirement for Fed president and then they push it through Congress. So that's completely legal. But if they start finding ways to retroactively get rid of people, then I would be concerned. Are there concerns about how the Fed would operate between the announcement of the next Fed chair and the end of Powell's term? Would there be confusion in the markets, for example, about which leader to turn to for guidance? And how could whoever is chosen as the next Fed chair navigate that or temper that?

18:42So it depends, of course, who the next Fed chair is, right? So if Kevin Hassett is appointed to replace Adriana Kugler's role, which is currently occupied by Steve Myron, he'll be going in January or February. And Powell's term expired in May. So there would be a couple months where Powell would be a lame duck. So in that case, whatever Powell give in terms of forward guidance in each of these FOMC meetings, financial markets would sort of discount and rather that they would listen to Kevin Hassett instead. But I will also have to say that Kevin Hassett's temperament is that he's very affable and he actually has a collegial relationship with Powell.

19:30And on top of that, Kevin Hassett risked his own skin in preventing Powell from being fired in 2018 and 2019. I think Kevin's personality and temperament would be that while he's on the board and while Powell is the chairman, he would not be like very combative, but he will be vocal about his disagreement with Powell. Well, so again, looking ahead to the next Fed chair's term, Trump has talked about getting interest rates below 2 percent, even against this backdrop of what Powell has termed stubborn inflation. If the next Fed chair were to aggressively cut rates to get us there, what do your model say, Anna, about what that might mean for the economy?

20:18Yeah, so it would mean a temporary boom ahead of the midterms. And then perhaps even through some parts of 2027. This is assuming there's not this X factor that somehow calms inflation down. And what would that X factor be? Productivity. OK. So Kevin Hazard truly believes that there exists this X factor. He has said that he believes productivity will be 4 % next year. Because if he is right, then even with GDP growth at over 3%, would not be inflationary because of that productivity growth. But traditional economic models, not assuming this productivity growth, will say that inflation will go about 3 % or even 3.5 % by 2027 because traditional models do not assume that there's this X factor.

21:13And these models would say that the Fed, in that case, will have to hike at that time in 2027. Otherwise, it would just keep drifting toward 4%. And then there will be a bust right before the presidential election in 2028, basically a bust from the end of 2027 through 2028.

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