MW The Fed will be forced into deep rate cuts in 2026 - boosting gold and breaking the dollar
By Felix Vezina-Poirier
The next Fed chair will grapple with a deteriorating U.S. job market and slower economic growth
U.S. job growth is modest and momentum is weak.
Slowing growth, weakening employment and contained inflation already argue for easier central bank policy.
The U.S. Federal Reserve will likely cut rates more this year than both central bankers and financial markets expect.
This is largely because the U.S. labor market continues to deteriorate. While job openings appeared to stabilize in October, quits have fallen, pointing to ongoing loosening. Wage growth tells the same story.
The November employment report reinforced this view. Job growth was positive, but gains were concentrated in education and health services. More cyclical sectors showed minimal growth. Crucially, the unemployment rate rose to 4.6% from 4.4%, while the U-6 underemployment rate increased to 8.7% from 8.0%.
These data validate the Fed's recent "insurance" cuts. They do not seal the case for a January move, but they materially lower the bar for additional easing. Job growth remains modest and subject to large revisions, while private-sector momentum is weak.
Importantly, the data also help resolve the key macro debate of recent months: Whether the job slowdown is demand-driven or supply-driven. Rising unemployment, cooling wages, falling quits and weakening sentiment among workers and firms all point toward weaker labor demand rather than structural labor shortages.
While the labor market has not collapsed, it is effectively at a standstill and shows no signs of acceleration. With the Fed's own unemployment projection at 4.5% for 2025, any further deceleration would justify more easing than markets currently price.
Read: U.S. on verge of unemployment surge that forces Fed to slash rates, Wall Street veteran says
Rumblings and dissent
At its December 2025 meeting, the Fed cut interest rates by 25 basis points (0.25 percentage points), bringing its policy range to 3.5%-3.75%. The decision once again revealed divisions within the committee. Fed governor Stephen Miran favored a larger 50-basis-point cut, while Presidents Jeffrey Schmid and Austan Goolsbee voted for no change - with Schmid dissenting for a second consecutive meeting.
The central bank's "dot plot" reinforced those divisions. In addition to the formal dissents, four participants registered so-called "soft" dissents, indicating that, while they may not have been voters, they believed policy should have remained unchanged. Looking ahead, the dots point to just one additional rate cut in 2026.
That projection rests on two assumptions embedded in the Fed's Summary of Economic Projections: Stronger growth and lower unemployment next year. While possible, this is not the most likely outcome. Before answering why, it is worth assessing where monetary policy stands.
How restrictive is the Fed?
Assessing the stance of monetary policy is more art than science. At its core, the economy can be thought of as a machine. Effective macroeconomic management aims to keep that machine running neither too hot nor too cold.
Run the machine too hard and it overheats. In economic terms, that shows up as excess inflation. Run it too slowly and it cools down. In economic terms, that shows up as excess unemployment. For the U.S. economy, the machine is driven by private-sector decisions while policymakers adjust conditions at the margin.
This is where the concept of the "natural rate of interest," often referred to as r-star, comes into play. R-star is the interest rate consistent with the economy expanding in line with its capacity, where resources are fully employed and inflation sits at the central bank's target.
That rate is extremely difficult to pin down. It is not directly observable. The Fed's own estimate places r-star at 3%, with individual FOMC participants' estimates ranging from 2.6% to 3.9%. This wide range explains why Fed Chair Jerome Powell has emphasized that policy is now entering the range of neutral estimates.
Market pricing offers an alternative perspective. The five-year, five-year forward swap rate, often viewed as a proxy for long-run equilibrium, currently sits near 3.5%. While above the Fed's central estimate, it sends a similar signal: Policy is approaching neutrality but remains restrictive.
Importantly, interest-rate-sensitive sectors such as housing remain under pressure and the labor market continues to lose momentum. These are tangible signs that policy still weighs on economic activity.
The next chair
Attention has also turned to Powell's successor as Fed chair. Kevin Hassett, the White House National Economic Council Director, appears to be the leading contender. Market reaction to Hassett has been muted, but commentary has skewed negative, reflecting concerns that appointing a close ally of President Donald Trump could undermine Fed independence.
Trump has been openly critical of the Fed and has pushed for lower rates as growth slowed in 2025. Hassett may have a strong chance, but the decision is not settled. A similar signal has been floated around former Fed governor Kevin Warsh, who is roughly tied with Hassett in betting markets.
The key point is that even a politically aligned nominee may not trigger a sustained market reaction in the near term. Slowing growth, weakening employment and contained inflation already argue for easier policy. Fundamentals will matter more than personalities in the medium term.
The real test for a dovish Fed chair would come when inflation pressures reaccelerate. Until then, even a politicized Fed chair would likely receive a grace period from markets. In a world of larger and more frequent inflation shocks, credibility and anchored expectations are essential for managing large debt loads, a consideration that also matters for Senate Republicans.
Investment implications
Central banks now must operate against a less stable macro backdrop, with inflation shocks more volatile and persistent - many driven by geopolitical instability. Investors should reinforce strategic inflation hedges by expanding portfolios beyond stocks and bonds.
Tactically, gold (GC00) tends to perform best when economic growth is weak, while broader commodities fare better when growth is strong. The U.S. dollar DXY faces a more challenging environment. Investors should pay close attention to how the dollar responds to negative economic growth news, as that reaction will offer important clues about the greenback's evolving safe-haven status.
Felix Vezina-Poirier is the chief strategist for Daily Insights, BCA Research's global cross-asset strategy service. Follow him on LinkedIn and X.
More: The Fed is protecting banks from market reality - damaging its independence and credibility
Also read: Trump says he'll announce new Fed chair in January as he renews attacks on Powell
-Felix Vezina-Poirier
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(END) Dow Jones Newswires
January 10, 2026 12:17 ET (17:17 GMT)
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