The Federal Reserve's interest rate cut in October has become a foregone conclusion, and under the influence of conflicting data, the policy direction for 2026 remains a mystery

The Federal Reserve is preparing to cut interest rates again this month, as the currently weak job market outweighs inflation concerns, but this balance may not last long.

Powell previously warned that further deterioration in the job market could lead to a rise in the unemployment rate, paving the way for a 25 basis point rate cut on October 29. Futures market traders expect another rate cut in December, which would align with the median forecast from Fed officials last month.

However, a significant number of Fed officials are calling for caution. Among the 19 officials, 8 expect no further rate cuts next year, citing that inflation has been above target levels for 54 consecutive months and still faces upward pressure from tariffs. This means that the interest rate path for 2026 is far less clear than the steady downward trend currently bet on by financial markets.

Cleveland Fed President Beth Hammack and Dallas Fed President Lorie Logan will rotate into voting seats next year, both of whom are cautious about further rate cuts. Powell's term as chairman will end in May next year, adding more uncertainty to the policy outlook.

Employment Data Drives Rate Cut Consensus

Weak job growth in recent months, coupled with significant downward revisions to early data, has overturned the widespread perception of a healthy and strong U.S. labor market. The new consensus is a low-hiring, low-firing economy, with no signs of large-scale layoffs yet.

Powell stated on October 14 at an economic conference that we are in a position where a further decline in job vacancies is likely to translate into a rise in the unemployment rate. He believes this balance may be very fragile.

His remarks are seen as confirming a 25 basis point rate cut this month. Former St. Louis Fed President James Bullard indicated that there would be another rate cut in October. However, he also pointed out that the persistent high inflation and strong economic growth are putting the December rate cut at risk.

Stubborn Inflation Raises Hawkish Concerns

Former senior advisor at the San Francisco Fed, Tim Mahedy, noted that inflation has been at or below target levels for 54 months. There are undoubtedly risks in the labor market, but as evidenced by the government's announcement last week of potential additional tariffs, there are also risks on the inflation front, especially as the economy continues to move forward.

The latest trade tensions have once again highlighted the ongoing threat of tariffs, a concern strong enough to persuade 8 of the 19 Fed officials to expect no further rate cuts next year.

Within the Fed, the push for rate cuts has recently been led by governors Christopher Waller and Michelle Bowman, both of whom view employment as a primary concern. New governor Stephen Miran, appointed by Trump, took office last month and advocates for rapid consecutive rate cuts of 50 basis points, but he remains an outlier for now.

2026 Policy Path Faces Multiple Variables

Economic data has failed to provide clear guidance, as it points in different directions—economic growth and consumer spending remain resilient, while hiring has slowed. The government shutdown has frozen the release of a large amount of key data, complicating matters further. Weekly comments from Fed officials are evolving into increasingly heated debates Powell's term as chairman will end in May next year. Trump stated that he would choose a successor committed to lowering borrowing costs and seek other ways to push the central bank in that direction.

Stephanie Roth, chief economist at Wolfe Research, believes that the balance of employment and inflation risks will ultimately determine the policy debate in 2026, which may lead to the Federal Reserve taking actions that are more cautious than investors currently expect. The eventual rate cuts by the Federal Reserve may be less than what the market is pricing in, which could become apparent early next year as the economy shows signs of overheating.