Fed Rate-Cut Outlook for 2026: Traders Expect Under 75 Basis Points by Year-End

The Federal Reserve's 2026 rate-cut path remains a focal point for investors, with traders and analysts projecting a cautious easing cycle that could see the federal funds rate fall by less than 75 basis points by year-end. While the Fed's December 2025 meeting is widely expected to deliver a 25-basis-point cut-bringing the target range to 3.50%-3.75%-the broader trajectory hinges on a delicate balancing act between inflationary pressures and a softening labor market. This analysis examines the Fed's likely easing path and its implications for equity and fixed-income markets, drawing on recent forecasts and market signals.

The Fed's 2026 Easing Path: A Gradual and Uncertain Journey

The Federal Open Market Committee (FOMC) faces a divided outlook as it navigates 2026. While officials like New York Fed President John Williams have signaled support for rate cuts, others, including Boston Fed President Susan Collins, have cautioned against overreacting to short-term economic data. Market expectations reflect this tension: traders currently price in an 87% probability of a December 2025 cut, with Goldman Sachs Research forecasting a terminal rate of 3%-3.25% by December 2026. This implies two to three additional 25-basis-point cuts in 2026, with a pause expected in January 2026 before resuming in March and June.

However, the path is far from certain. J.P. Morgan anticipates only one rate cut in 2026 following two in 2025, while BofA projects two cuts in mid-2026 (June and July) at a similar terminal rate of 3.00%-3.25% according to Reuters. The key variables will be labor market resilience and inflation trends. A sharper-than-expected slowdown in hiring or a relapse in inflation could delay further easing, whereas persistent weakness in wage growth or consumer demand might accelerate the timeline.

Equity Market Implications: Quality and Secular Themes Take Center Stage

The Fed's gradual easing is likely to sustain equity market gains, particularly for sectors insulated from cyclical volatility. According to J.P. Morgan, investors should prioritize "quality and profitability" over cyclical industries, with large-cap and secular growth stocks-such as those in artificial intelligence, renewable energy, and healthcare-offering the most compelling opportunities. The "Magnificent 7" companies have already driven much of the recent rally, but a broader dispersion of returns is expected as rate cuts lower borrowing costs and boost corporate valuations according to J.P. Morgan.

However, risks remain. A prolonged pause in rate cuts could weigh on growth stocks, while a sharper-than-anticipated easing cycle might reignite inflation concerns, pressuring value sectors. Investors should remain selective, favoring companies with strong balance sheets and recurring revenue streams to weather potential volatility.

Fixed-Income Markets: Navigating a Steep Yield Curve and High-Quality Opportunities

For fixed-income investors, the Fed's 2026 rate-cut path presents a dual dynamic. While the prospect of lower rates could drive bond yields downward, the yield curve is expected to remain steep due to increased supply in government, municipal, and corporate bonds. Schwab's 2026 outlook highlights that yields on major developed market sovereign bonds have remained near multi-year highs, supported by a resilient but uncertain economic backdrop.

Investors are advised to focus on high-quality sovereign bonds with intermediate-term durations, as these offer a balance between yield and risk according to Schwab. Fidelity notes that short- and intermediate-term bond funds may provide the most attractive risk-return profiles, given their lower volatility compared to longer-duration assets according to Fidelity. Additionally, Treasury Inflation-Protected Securities (TIPS) and municipal bonds could serve as hedges against inflation and tax liabilities, respectively according to Schwab.

Conclusion: A Watchful Eye on Data and Policy Signals

The Fed's 2026 rate-cut path is poised to be a defining factor for both equity and fixed-income markets. While traders and analysts broadly anticipate under 75 basis points of easing by year-end, the exact timing and magnitude will depend on evolving economic data. For equities, a focus on quality and secular growth themes will be critical, while fixed-income investors should prioritize high-quality, intermediate-term bonds to capitalize on the Fed's easing cycle. As always, vigilance toward inflation trends and labor market developments will be essential for navigating the uncertainties ahead.