Federal Reserve Easing Expectations: Could Interest Rates See Three Cuts in Early 2026?

According to recent analysis from Moody’s Analytics Chief Economist Mark Zandi, the Federal Reserve may pursue a more aggressive interest rates reduction strategy than currently anticipated by both market participants and Fed officials. Rather than the moderate pace widely expected, Zandi projects that the central bank could implement three consecutive interest rate cuts in the first half of 2026, with each reduction amounting to 25 basis points.

What’s Driving the Anticipated Rate Cuts?

The core rationale behind this more dovish outlook centers on labor market deterioration and persistent policy uncertainties. Zandi emphasizes that ongoing weakness in employment conditions will be the primary catalyst for monetary policy easing during the first half of next year. The economist notes that businesses face mounting uncertainty regarding potential shifts in trade policy and immigration regulations, alongside other emerging risks that could disrupt their operations.

“Until companies gain sufficient confidence that these policy changes won’t create unexpected challenges, they will hesitate to expand their workforce,” Zandi explained. This hesitation in hiring decisions means job growth will remain insufficient to stem a potential rise in the unemployment rate during the first half of 2026.

The Feedback Loop: Unemployment and Interest Rates

The relationship between labor market conditions and monetary policy becomes self-reinforcing under Zandi’s scenario. As the unemployment rate continues to climb, the Federal Reserve will face mounting pressure to cut interest rates in response. This dynamic creates a compelling case for the three-cut scenario, contradicting the more conservative expectations currently embedded in market pricing and Federal Reserve communications.

Zandi’s projection represents a notably more aggressive stance compared to the consensus view, suggesting that labor market weakness—not inflation concerns—will dominate the Fed’s decision-making process in early 2026.