The Federal Reserve's interest rate cut in October is set, but conflicting data has made the policy direction for 2026 a mystery.

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The Federal Reserve is prepared to cut rates again this month, as the current weak job market outweighs inflation concerns, but this balance may not last long.

Powell previously warned that further deterioration in the job market could lead to a rise in the unemployment rate, paving the way for a 25 basis point rate cut on October 29. Futures market traders expect another rate cut in December, which would be in line with the median forecast made by Fed officials last month.

However, a considerable number of Fed officials are calling for caution. Of the 19 officials, 8 expect no further rate cuts next year, citing the fact that inflation has exceeded target levels for 54 consecutive months and still faces upward pressures such as tariffs. This means that the rate path in 2026 is far less clear-cut than the steady downward trend currently priced in by financial markets.

Cleveland Fed President Beth Hammack and Dallas Fed President Lorie Logan will rotate into voting seats next year, and both have taken a cautious stance on further rate cuts. Powell’s term as chairman will end in May next year, adding more uncertainty to the policy outlook.

Employment Data Drives Consensus on Rate Cuts

In recent months, weak job growth, coupled with large downward revisions to early data, has upended the prevailing view that the U.S. labor market is healthy and strong. The new consensus is an economy with low hiring and low firing, with no sign yet of large-scale layoffs.

On October 14, Powell said at an economic conference that we are at a point where a further decline in job vacancies is likely to lead to a higher unemployment rate. He considers this balance to be very fragile.

His remarks were viewed as confirmation that this month’s 25 basis point rate cut will happen. Former St. Louis Fed President James Bullard said another rate cut will take place in October. But he also pointed out that persistent high inflation and strong economic growth put the December rate cut at risk.

Stubborn Inflation Sparks Hawkish Concerns

Former San Francisco Fed Senior Advisor Tim Mahedy pointed out that inflation has stayed at or below target levels for 54 months. There are undoubtedly risks in the labor market, but as the government’s announcement last week about possible additional tariffs shows, there are also risks on the inflation front, especially as the economy continues to move forward.

The latest trade tensions once again highlight the persistent threat of tariffs, a concern strong enough to convince 8 of the 19 Fed officials that no further rate cuts will take place next year.

Within the Fed, the push for rate cuts has recently been led by Governors Christopher Waller and Michelle Bowman, both making employment their top concern. Newly-appointed Trump-nominated Governor Stephen Miran, who took office last month, advocates for rapid, consecutive 50 basis point rate cuts but remains an outlier for now.

Multiple Variables on the Policy Path for 2026

Economic data has failed to provide clear guidance, as it points in different directions—economic growth and consumer spending remain resilient, while hiring has slowed. A government shutdown froze the release of a large amount of key data, making the situation even more complex. Weekly comments from Fed officials are evolving into increasingly fierce debates.

Powell’s term as chair will end in May next year. Trump has said he will pick a successor committed to lowering borrowing costs and is also seeking other ways to steer the central bank in that direction.

Wolfe Research chief economist Stephanie Roth believes that the balance of risks between employment and inflation will ultimately determine the 2026 policy debate, which could result in Fed actions that are more cautious than currently expected by investors. The Fed’s eventual rate cuts may be less than what the market is pricing in, which could become evident early next year as the economy starts to run somewhat hot.

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