Rabobank suggests that due to political pressure from midterm elections and changes in the Fed's leadership landscape, the central bank may cut interest rates more aggressively in 2026 than currently anticipated.
On December 12, senior Rabobank strategist Philip Marey noted that to stimulate the economy ahead of the U.S. midterm elections, the Fed is expected to lower rates to neutral or below by November 2026, with the federal funds target range reaching 2.75%-3.00% by September 2026—down from the current 3.50%-3.75%.
A new Fed Chair will preside over their first FOMC meeting on June 17-18, 2026, and Rabobank predicts a rate cut announcement to demonstrate loyalty to the White House.
Earlier, former President Trump hinted at his preferred candidate, though Marey argues the nominee’s identity may matter less than their alignment with Trump’s agenda. When asked whether the next Chair must cut rates immediately, Trump responded, "Yes." Treasury Secretary Bessent is leading the selection process, prioritizing rate cuts, deregulation, and Fed restructuring.
Rabobank warns that politically motivated rate cuts could backfire, risking higher long-term Treasury yields if markets perceive the Fed sacrificing inflation control for political loyalty. Rising inflation expectations might then steepen the yield curve.
**Midterms as a Political and Policy Catalyst**
Marey highlights the 2026 midterms as a pivotal driver for Fed dovishness. Lower rates could boost economic growth, aiding Republican election prospects. With the federal funds rate currently restrictive, significant cuts before October 28, 2026—accounting for policy lag—are deemed necessary to impact the November 26 elections. Rabobank forecasts a 2.75%-3.00% target range by September.
**Power Shifts: "Shadow Chair" and Board Reshaping**
Once Trump announces his nominee, that individual will effectively act as a "shadow Chair," influencing markets even before taking office. If current Governor Waller or Bowman is nominated, they’d immediately wield internal influence. Alternatively, candidates like Hassett, Warsh, or Rieder could fill expiring board seats by early 2026, enabling participation in March’s FOMC meeting.
Even if Chair Powell retains his board seat post-tenure, Trump could consolidate control by pressuring dissenting members like Cook, potentially securing a 4-3 or 5-2 majority favoring White House priorities.
**Inflation Risks vs. Yield Curve Dynamics**
Marey cautions that if weak labor markets and subdued inflation align with Trump’s rate-cut goals, Treasury yields may fall. However, premature easing amid strong data could erode confidence in the Fed’s inflation resolve, lifting long-term rates. Persistent inflation paired with cuts might also fuel wage-price spirals.
While the Fed’s current Treasury purchases focus on short-term debt, a long-end yield surge could shift policy attention. Marey concludes that sustained inflation may elevate the role of non-monetary tools, such as tariffs, in price stability efforts.
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