By Jamie McGeever
ORLANDO, Florida, Dec 8 (Reuters) – Financial pundits seem convinced that the new Federal Reserve chair will be an uber-dovish Donald Trump loyalist intent on slashing interest rates regardless of the economic fundamentals. Markets aren’t buying it.
Jerome Powell, whose eight-year term as Fed chair ends in May, is widely expected to be replaced by the President’s top economic adviser Kevin Hassett. Trump indicated as much last week, saying he has narrowed his list down to one person and later introducing Hassett at a White House event as “a potential Fed chair.”
Hassett is undoubtedly a Trump loyalist. But market pricing clearly shows traders don’t think a Hassett-led central bank will loosen policy anywhere near as much as Trump has indicated.
In fact, barely 75 basis points of easing is expected by the end of next year, according to rates futures markets. That’s only three quarter-percentage-point rate cuts – two of them before Powell leaves, in all likelihood, and only one in the second half of 2026 with the new chair at the helm.
LOOSE PURSE STRINGS COULD CLIP FED WINGS
There are two ways of looking at this.
Either the risk of more easing in the second half of next year is underestimated, meaning risk assets are underpriced right now as well, or futures markets are correct, and the Fed is not going to be particularly dovish next year, capping the policy-driven upside for stocks and downside for the dollar.
All things considered, the latter looks more likely. The consensus median estimate in a recent Reuters poll has the S&P 500 index ending next year at 7,490 points, up only 9% from Friday’s close.
The expectation of limited Fed cuts in 2026 is reasonable considering what the new Fed Chair will be inheriting.
True, the U.S. labor market has weakened, but inflation has been above the Fed’s 2% target for nearly five years and counting.
And if the market’s expectations are correct, the new chair will come in with the Fed having already eased policy by 100 basis points: two cuts earlier this year, one later this week, and one in the first half of next year. And that’s on top of the 100 bps of cuts between September and December of 2024.
That would bring the federal funds target range down to 3.25-3.50%, a level few observers would consider restrictive. Far from it. With inflation still hovering around 3%, real interest rates could be close to zero when the new chair takes over.
What’s more, there’s a wave of fiscal stimulus coming next year in the shape of the “One Big Beautiful Bill Act” tax cuts and possible $2,000 tariff-funded stimulus checks for every household.
In an environment like this, how much looser can monetary policy realistically go?
BRACING FOR HISTORIC DISSENT
Powell’s replacement will also have the daunting task of forging a consensus in one of the most polarized Federal Open Market Committees ever. And that divide could harden next year.
While the new Fed Chair will almost certainly tilt the FOMC in a dovish direction, there will be an opposing force. Cleveland Fed President Beth Hammack and Dallas Fed President Lorie Logan, both arguably the most hawkish of all 19 FOMC members, will become voters in 2026.
Dissents on the FOMC are not uncommon, of course. They have been a feature of around one in five policy meetings chaired by Powell. They were also seen in nearly half the meetings chaired by his predecessor Janet Yellen and at more than 60% of those run by Ben Bernanke, according to a St. Louis Fed database.
But these were mostly single votes. October’s decision to cut rates by 25 basis points was only the third time since 1990 that there have been dissents in favor of both tighter and looser policy. And there have already been more dissents this year than any time in the past three decades.
Votes of 7-5, more reminiscent of Bank of England policy decisions, could thus now be in the cards. Such division would make it challenging to push through any agenda – no matter how hard the new Fed Chair might try.
(The opinions expressed here are those of the author, a columnist for Reuters)
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(By Jamie McGeever; Editing by Tomasz Janowski)
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