By Andrew Wright
Although it may be a new year, it brings many old questions, including how the Federal Reserve will manage interest rates in 2026. The Federal Reserve adjusts the federal funds rate, the rate at which banks in the Federal Reserve System lend to one another. Their objective in adjusting rates is to 1) keep inflation low and stable and 2) maintain full employment in the economy. After swiftly raising the federal funds rate in 2022 to combat inflation, the Federal Reserve began lowering its target rate slowly in the second half of 2024. The federal funds rate held steady for most of 2025; however, the Federal Open Market Committee (FOMC), the group within the Federal Reserve that sets interest rates, resumed rate cuts at its September meeting. The FOMC implemented additional cuts at its next two meetings in October and December.
Additionally, at the December meeting, the FOMC released its latest economic projections and monetary policy expectations. These projections summarize the views of the thirteen FOMC members on economic growth, unemployment, and inflation, as well as their views on appropriate monetary policy in both the short and long term. Table 1 summarizes FOMC members’ projections for 2026. While FOMC members largely agree on how the economy will perform this year, they differ on how the federal funds rate should change.
How the FOMC manages the federal funds rate in 2026 will depend on how inflation and unemployment change. All else equal, if inflation rises again, the FOMC is more likely to maintain or raise the federal funds rate. On the other hand, if unemployment increases, the FOMC is likely to lower the federal funds rate and may do so more rapidly than it currently plans. If we take the FOMC’s median projection as its most likely course of action, we expect the FOMC to make a single quarter-point cut to the federal funds rate in 2026. While it may implement this cut early in 2026, during its January or March meeting, it’s more likely that a single cut would occur in the third or fourth quarter of 2026. This would imply a 3.5-3.75 percent federal funds rate to start the year, with a cut to 3.25-3.5 percent at some point between June and December.
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