Fed Rate Cuts Coming: Economic Weakness Forces Policy Shift:
The Federal Reserve is heading toward deeper rate cuts in 2026 as the U.S. economy shows clear signs of deterioration. Recent employment data reveals a troubling pattern: unemployment has risen from 4.4% to 4.6%, while underemployment jumped to 8.7%. Job growth remains concentrated in defensive sectors like healthcare and education, while cyclical industries that drive economic expansion show minimal gains. This isn't a supply shortage problem it's weakening demand. Fewer people are quitting their jobs, wage growth is cooling, and both workers and businesses are becoming more pessimistic. The labor market hasn't collapsed, but it's effectively stalled with no signs of acceleration. With the Fed's own unemployment projection at 4.5% for 2025, any further deterioration would justify more aggressive easing than markets currently expect.
The Fed's December 2025 meeting highlighted internal divisions that signal more cuts ahead. While the committee delivered a 25 basis point cut to 3.5%-3.75%, Governor Stephen Miran pushed for a larger 50 basis point reduction, and two regional presidents voted against any cut at all. The central bank's "dot plot" projections show only one additional rate cut planned for 2026, but this assumes stronger growth and lower unemployment an optimistic scenario that current data doesn't support. Policy remains restrictive despite approaching the "neutral" range, as evidenced by continued pressure on interest-sensitive sectors like housing and the ongoing labor market softening. The next Fed chair, likely Kevin Hassett or Kevin Warsh, will inherit an economy requiring more accommodation than currently planned, regardless of political considerations.
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Shanu
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