Traders now anticipate the Federal Reserve will cut rates by only 50 basis points in 2026, primarily in the first half of the year, before pausing—a sharp reduction from earlier expectations of three cuts. Nomura analysts suggest that potential fiscal stimulus and stronger-than-expected corporate earnings could fuel inflation persistence, limiting the Fed's ability to implement deeper rate cuts.
Market expectations for aggressive Fed easing next year are fading, while other major central banks—including the European Central Bank (ECB) and the Bank of Canada—face potential rate hikes. This policy divergence may redefine global monetary dynamics in 2026.
Beyond a widely expected 25-basis-point cut this week, traders now project just two additional Fed rate cuts in 2026, concentrated in early 2026 before a pause. This marks a significant pullback from prior forecasts of three cuts.
Nomura’s Charlie McElligott notes that former Trump advisor Kevin Hassett’s pro-growth policies, combined with upcoming fiscal stimulus and corporate earnings surprises, could heighten inflation risks—constraining the Fed’s rate-cut trajectory.
Meanwhile, swaps pricing indicates the ECB is more likely to hike than cut rates in 2026, with similar shifts in Australia, New Zealand, and Canada. The dollar has already fallen over 8% this year, and further policy divergence could amplify its decline.
**Traders Rethink Fed Rate-Cut Bets** SOFR futures show the narrowest negative spread since June between December 2025 and December 2026 contracts, reflecting reduced easing expectations. SOFR options flows reveal heavy hedging for a mid-2026 Fed pause after initial cuts.
JPMorgan’s latest survey shows Treasury investors unwinding long positions, shifting to neutral. The 10-year yield has climbed to September highs as bullish momentum fades.
Lauren Goodwin of New York Life Investments warns that deep rate cuts could undermine the Fed’s inflation-fighting credibility. While not her base case, she acknowledges 2026 Fed hikes as a risk.
**Inflation Risks Reshape Fed Policy** McElligott highlights that Trump-era fiscal policies, weak-dollar advocacy, and corporate earnings upside could entrench sticky inflation above 3.5%—making gold, not bonds, the preferred equity hedge. This scenario would disrupt prior assumptions of aggressive Fed easing.
Key data—including November and December jobs reports—will guide the Fed’s January 28 meeting.
**Global Central Banks Diverge** Unlike the Fed, the ECB now faces higher odds of 2026 rate hikes. Markets also price in tightening for Australia and Canada, while the Bank of England may bottom by mid-2026. This split stems partly from Trump trade wars having milder-than-expected spillover effects.
The policy gap could extend the dollar’s 8% annual drop, as traditionally low-rate economies like the eurozone pivot toward tightening—narrowing yield differentials with the U.S.
**Risk Disclosure** Investing involves risks. This analysis does not constitute personal investment advice. Users should assess whether views align with their specific financial circumstances. Decisions are at the investor’s own risk.
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