Key takeaways
- With the unemployment rate stabilizing and inflation holding steady, the Fed chose not to cut rates at its January meeting, in line with consensus expectations.
- The nomination of Kevin Warsh as new Fed chair raises questions about the direction of interest rate cuts in 2026.
- However, J.P. Morgan Global Research continues to expect the Fed to remain on hold this year.
As widely expected, the Federal Reserve (Fed) held rates steady at its meeting in January, maintaining a federal funds rate of 3.5–3.75%. In light of the latest labor market data and the nomination of a new Fed chair, what is the outlook for interest rate cuts this year?
Will interest rates go down in 2026?
With the December jobs report alleviating concerns about a slackening labor market, and the unemployment rate ticking down to 4.4%, J.P. Morgan Global Research no longer expects the Fed to cut rates this year.
“Over the second half of 2025, the economy seems to have settled into an equilibrium of slower labor supply growth met by slower labor demand growth, though with few signs of further deterioration,” said Michael Feroli, chief U.S. economist at J.P. Morgan. “We see the Fed holding the target range for the funds rate steady at 3.5-3.75% for the rest of the year.”
Thereafter, the Fed is projected to hike rates by 25 bp in the third quarter of 2027, bringing the upper band for the policy rate back up to 4%.
“The proposition that rates are restrictive looks increasingly untenable given economic and financial developments,” Feroli said. “If the labor market weakens again in the coming months, or if inflation falls materially, the Fed could still ease later this year. However, we expect the labor market to tighten by the second quarter and the disinflation process to be quite gradual.”
“Our best guess is that this year Warsh will make the case for rate cuts. We’d also suspect that as time goes on, his leanings will be more open to revision and perhaps reversion back to a more hawkish view.”
Michael Feroli
Chief U.S. economist, J.P. Morgan
How might the nomination of Kevin Warsh as new Fed chair shape monetary policy?
On January 30, President Trump nominated Kevin Warsh to become the next Fed chair, replacing Jerome Powell when the latter’s term ends in May 2026. Warsh is a former Fed governor from 2006 to 2011 and was known to favor holding interest rates higher for longer, particularly in the years after the global financial crisis.
That said, recent comments from Warsh suggest a more dovish stance, in line with the administration’s monetary policy preferences. “The first set of questions that the Warsh nomination poses is what his true leanings are and how long will they persist in that direction,” Feroli said. “Our best guess is that this year he will make the case for rate cuts. We’d also suspect that as time goes on, his leanings will be more open to revision and perhaps reversion back to a more hawkish view, particularly as we get past the midterms.”
While Warsh’s nomination is viewed as favorable to concerns over Fed independence, Feroli believes that even in his capacity as chair, Warsh may not have an easy time persuading the committee to lower rates. “While committee members are always open to better arguments, special deference to the chair only goes so far,” Feroli said.
One area that Warsh could impact is the shrinking of the Fed’s balance sheet, a topic believed to have wider support on the committee. “However, we are skeptical of Warsh’s argument that a smaller balance sheet implies lower interest rates,” Feroli said. “A smaller balance sheet should exert some moderate upward pressure on longer-term interest rates. This would be at odds with the administration’s apparent desire to lower mortgage rates.”
Warsh’s confirmation may also require the administration to drop their criminal probe into Powell. Senator Thom Tillis, a key member of the Senate Banking, Housing and Urban Affairs Committee, has said he will oppose confirming any member of the Fed until the probe is “fully resolved.” “Without a confirmation vote, Powell could stay on as chair pro tem [for the time being] past May,” Feroli said. “We suspect this will provide enough incentive for the administration to resolve the investigation, and for Warsh to be eventually confirmed several weeks from now.”
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