The U.S. Federal Reserve may not give President Donald Trump all the rate cuts he wants, but the view of the economy policymakers included in new economic projections on Wednesday should buoy the administration nonetheless with its outlook for faster growth, lower inflation and steady unemployment heading into the 2026 midterm elections.
The Fed, in fact, may be done cutting rates for now, Fed Chair Jerome Powell and his fellow policymakers signaled after their most recent rate meeting. But that's because they anticipate the U.S. to emerge from a period of volatility and upheaval over tariffs and immigration into a year of strong productivity, ongoing consumer spending, and inflation that falls as the impact of tariffs on goods prices begins to wane.
"I really want to turn this job over to whoever replaces me with the economy in really good shape: that's what I want to do," Powell said at his news conference Wednesday, following the Fed's decision to cut the policy rate for a third straight time and signal a pause ahead. "I want inflation to be under control - going back down to 2% - and I want the labor market to be strong."
Nearly a third of policymakers were unhappy with Wednesday's rate cut, the projections showed, and another third want more than the median expectation of one rate cut for all of next year. But despite those divisions, which Powell said were largely due to disagreements over whether inflation or a weak labor market poses the bigger risks, central bankers by and large expect next year to look solid.
Wednesday's rate cut "should help stabilize the labor market while allowing inflation to resume its downward trend toward 2% once the effects of tariffs have passed through," Powell said.
The quarterly projections show prices are rising faster, interest rates are higher, and economic growth is slower than central bankers anticipated last September, just before Trump's November election victory.
But for next year, central bankers see broad improvements that amount to a "soft landing" for the U.S., and an easing of fears that the economy was heading for what some analysts called "stagflation lite," with high joblessness and high inflation.
Inflation is expected to end 2026 at 2.4% versus 2.9% at the end of this year, the Fed's fresh projections show, as tariffs' upward push on goods prices dissipates. Economic growth is seen accelerating to 2.3% compared with 1.7% this year, benefiting from a bounceback after this year's government shutdown.
And the unemployment rate, reported at 4.4% in September, is expected to tick up slightly before ending 2026 back at 4.4% again.
Powering that picture, Powell said on Wednesday, is a rise in productivity poised to accelerate amid the adoption of artificial intelligence. Productivity growth has been a key argument for rate cuts from administration officials including White House economic advisor Kevin Hassett, seen as the front-runner for Powell's replacement.
But while the new Fed chair may inherit a solid economy, he will take the helm of a group that is by no means sold on the need for further policy easing. Indeed, Powell repeatedly said the latest rate cut leaves Fed officials well-positioned to wait and see - hardly an endorsement of the sharp rate cuts Trump says he wants his new Fed chair to deliver.
Source: Reuters