Fed Governor: Fed Should Cut Rates by Over 100 Basis Points This Year

A senior Federal Reserve governor has called for a significant reduction in interest rates in 2026, suggesting cuts of over 100 basis points. This recommendation aligns with recent economic data showing a slowdown in the labor market and persistent inflation pressures. The Fed's policy direction remains a key focus for investors and markets.

The December FOMC minutes revealed continued internal disagreement within the Federal Open Market Committee (FOMC). The committee voted 9-3 in favor of a 25-basis-point rate cut, with some members urging for a pause due to uncertainty around inflation and labor market conditions. These dissents reflect growing policy divergence as the Fed navigates its dual mandate.

Market expectations for rate cuts have shifted in recent weeks. As of January 6, 2026, the probability of a rate cut at the January FOMC meeting has dropped to 15%, with 54% expected at the March meeting and 77% at the April meeting. These probabilities suggest that the next cut will likely occur in April.

Why Did This Happen?

The Fed's decision to cut rates in December was influenced by weak labor market data, including a lower-than-expected nonfarm payrolls report. Some analysts believe the reported job gains were overstated, with the Fed estimating the economy could be losing jobs each month. This labor weakness has forced the Fed to prioritize employment over inflation control.

Despite inflation remaining above the Fed's 2% target, the central bank has chosen to ease policy to support the labor market. The December FOMC minutes revealed that some officials viewed inflation risks as upside-biased, but the labor market's deterioration was a more immediate concern.

How Did Markets React?

Stocks have shown a mixed reaction to the Fed's rate-cutting cycle in early 2026. While the S&P 500 and Nasdaq began the year with modest gains, recent volatility has led to weekly losses. The Russell 2000 has shown relative strength, with investors seeking out smaller-cap and industrial stocks.

Treasury yields have also responded to the Fed's easing stance. The 10-year Treasury yield rose to 4.171% by the end of January, while the 30-year yield reached a three-month high of 4.864%. These increases reflect growing optimism about economic growth, despite the potential for higher inflation.

What Are Analysts Watching Next?

The coming weeks will bring a series of key economic reports, including the ADP Employment Change, Nonfarm Payrolls, and JOLTs data. These reports will provide further insight into the labor market's health and could influence the Fed's policy decisions.

Investors are also monitoring the trajectory of Treasury yields and whether the Fed's rate cuts will lead to a broader economic slowdown. If inflation remains elevated despite lower rates, the Fed may be forced to revisit its policy stance.

The broader market is preparing for a shift in monetary policy in 2026. While the Fed has signaled its willingness to cut rates further, the timing and magnitude of these cuts will depend on incoming data and market conditions. For now, investors are cautiously optimistic about the outlook for rate reductions.