Now that Federal Reserve Chairman Jerome Powell finally capitulated and has reinitiated the Federal reserve’s rate-cutting campaign, there may be many more interest rate cuts in 2026 than the market is pricing in. With almost a 100% chance of a 25 basis point cut priced in for Fed Funds in October, the market is anticipating that the Funds rate will be cut to a 3.75-4.00% range on October 29. This is down from the 4.00-4.25% current range and is down from the more recent peak of 5.25-5.50% from 2023 to 2024.
The market is also anticipating that more rate cuts will take Fed Funds even lower into 2026. Oggonomics currently expects that the market is undershooting on the amount of rate cuts. This would be welcome news for borrowers who want to take out new mortgages, borrow for their business, keep using their credit cards, take out car loans and so on. Having lower interest rates would also help the federal government (and state and county governments) potentially lower their overall borrowing costs.
It is technically only short-term rates which are directly affected by Federal Reserve rate cuts. The daily buying and selling of Treasury bills/notes/bonds by investors, plus quantitative easing/tightening efforts, are actually determined by market forces.
Unless the market wants to go back to an inverted yield curve with intermediate-term and long-term rates lower than short-term yields (very bad for the economy as a whole), then short-term rates have to generally be lowered to allow longer-term rates to come down as well.
Oggonomics is exploring why the market may be grossly undershooting on its interest rate cut expectations in 2026.
The CME FedWatch Tool most recently had 98.9% odds that the Fed Funds range would be cut to 3.75-4.00% at the October 29 FOMC meeting. The odds were also last seen at 96.1% for a cut to a 3.50-3.75% Fed Funds range for the December 10, 2025 FOMC meeting.
Where things start to get murky is how much or how little Jerome Powell and his FOMC members will cut rates in 2026. These are the highest odds for FOMC meeting rate cuts in 2025 for each effective range of Fed Funds:
- Jan 28, 2026 — 53.4% for 3.25-3.50% and 44.6% for 3.50-3.75%
- Mar 18, 2026 — 29.5% for 3.00-3.25% and 48.7% for 3.25-3.50% (and 20.8% for 3.50-3.75%)
- Apr 29, 2026 — 35.3% for 3.00-3.25% and 40.3% for 3.25-3.50% (14.6% for 3.50-3.75%)
What the market may not currently be factoring in that Jerome Powell’s term as Federal Reserve chairman will end on May 15, 2026 — so his last tenured meeting will be the April 29, 2026 FOMC meeting. While Powell is still eligible to serve as a Board of Governors member until January 31, 2028, the reality is that a new Fed Chairman will almost certainly be in place almost immediately or immediately upon the end of Powell’s term. President Trump has been quite vocal calling for much faster and more aggressive rate cuts than what has so far been seen under Chairman Powell.
So, what are the chances that Trump’s would-be pick for the next Chairman of the Federal Reserve will continue to tip-toe through rate cuts in 2026? Let’s first look at what the market is factoring in as of now.
Here are the current highest odds of Fed Funds for the Jun 27, 2026 FOMC meeting:
- 2.75-3.00% at 24.4%
- 3.00-3.25% at 38.2%
- 3.25-3.50% at 25.4%
And for the September 16, 2026 FOMC meeting:
- 2.50-2.75% at 17.6%
- 2.75-3.00% at 30.6%
- 3.00-3.25% at 28.9%
- 3.25-3.50% at 14.1%
And then skipping out to the December 9, 2026 FOMC meeting (skipping the October 2026 FOMC meeting for representation):
- 2.50-2.75% at 20.9%
- 2.75-3.00% at 29.8%
- 3.00-3.25% at 24.9%
- 3.25-3.50% at 11.1%
This current December-2026 pricing implies that the CME FedWatch Tool is presently looking at combined odds of 54.7% for Fed Funds to be in a range of 2.75-3.25%, with odds slightly favoring the 2.75-3.00% range. That might only be just 75-100 basis points lower than the effective rate after the expected rate cut for the October 29, 2026 FOMC meeting.
Oggonomics is not presently predicting or forecasting that interest rates will go anywhere back to the free-money days 0.00% effective Fed Funds during covid and during the Global Financial Crisis. This is also not a prediction that short-term rates will suddenly head back down to even around 1.00%.
Let’s do some basic math or logic here. President Trump has been quite vocal about that interest rates should have been cut much sooner and much faster than Jerome Powell’s rekindled rate-cutting campaign showed in 2026. Trump has even wanted to fire Powell from his job before his term expires. And President Trump and his team are in charge of appointing the next Chairman of the Federal Reserve. His pick may face some scrutiny, but his pick for the next Chairman is very likely to be confirmed by the Senate (hint – all FOMC Chairman appointees end up being confirmed).
And now let’s add in that the U.S. has been paying excessively higher borrowing rates than most other developed nations. And add in that the debt servicing costs of all U.S. Treasury and intragovernmental borrowing (nearly at $38 trillion at the present time) is now in excess of $1 trillion per year. Rate cuts won’t make the debt servicing costs come down immediately, but this should help line-items in the budget over time.
And, yes, there are ramifications of rate cuts if they exceed what the market deems as a natural rate. The U.S. dollar could weaken much more than expected. Inflation could pick up further. More asset bubbles can form. International and domestic bond investors could look for other alternatives. And there are many more important issues that could come up…
At the end of the day, it currently seems very possible that the financial markets (or at least the CME FedWatch Tool) are undershooting on how low Fed Funds may be cut by the end of 2026. That said, there are no guarantees when it comes to the financial markets. And there are no guarantees that there won’t be at least some consequences if rates go too low.
