FOMC members don't expect much easing of monetary policy in 2026.
As expected, the Fed reduced the target for the fed funds rate by 25 basis points to 3.5 – 3.75% on Wednesday. The more important outcome from the meeting may be the updated statement of economic projections (SEP) released following the meeting. The SEP shows FOMC expectations for interest rates and the economy over the next two years. The SEP released yesterday showed little change from September’s projections; members’ projections for the level of the federal funds rate were the same as in September. In fact, the only major change was a ½ percent increase to the median projection for 2026 GDP.
The 3.4% projection for the Fed funds rate in 2026 implies roughly one 25 bps reduction to the fed funds rate next year from the current target. The upshot is that unless there is a significant change in employment or inflation there may not be much more easing over the short term. And, during his press conference following the meeting, Chair Powell made several comments implying that we could now be at or near the neutral rate.
Stocks initially reacted positively, as the S&P 500 finished the day up 0.7%, but opened Thursday down almost 1%. If the market was looking for further monetary easing as a catalyst to keep the risk-on momentum going, the latest projections could put a damper on sentiment.
That being said, there is potential cause for the market to discount Wednesday’s data – Powell’s term expires in May of next year, meaning that in roughly six months we will have a new Fed chair. President Trump has made no secret about his desire for lower interest rates and is likely to appoint a chair who will try to deliver additional rate cuts. So, while the projections from the current FOMC don’t imply much in the way of easing next year, things could look different with a new chair leading the committee next year.
At this point, there are no signs that US equities are weakening. In fact, as we’ve discussed over the last couple of weeks, participation has improved recently. But Wednesday’s SEP does introduce a new potential risk factor – that diminished prospects for further easing could dampen sentiment.
