Fed Rate Cut Pause Won't Be Long-lasting, 25 bps Cuts in March and June Possible

The Federal Reserve’s rate policy continues to face political pressures, with analysts noting that while independence remains intact, challenges persist. Recent developments include a criminal investigation into Fed Chair Jerome Powell by the Department of Justice, raising concerns over potential interference in monetary policy decisions according to Citi analysts.

Citi Research analysts have emphasized the structural design of the Federal Reserve, which includes a 14-year term for governors and a multi-layered governance system, as a buffer against political interference according to Citi Research. Despite these safeguards, the broader political climate remains a source of concern for some economists, particularly regarding the potential for inflation risks in the long run as reported by Morningstar.

Market participants have responded with cautious optimism, with gold and Treasury yields reflecting some of the uncertainty. However, major U.S. indices have not seen significant repricing, suggesting that the market has not yet priced in a sharp shift in Fed policy according to Citi analysts.

Why the Move Happened

The Federal Reserve’s independence is reinforced by its multi-tiered governance structure, according to Citi Research. This includes a 14-year staggered term for governors and the insulation of monetary policy from direct political influence as Citi Research notes.

This structural independence has helped prevent past attempts to sway the Fed’s decisions. However, recent escalations in political pressure, including a subpoena against the Fed, have raised concerns about potential shifts in the central bank’s policy autonomy according to Morningstar analysis.

Analysts at Citi and Morningstar have expressed cautious optimism, noting that while independence remains under threat, the Fed has not shown signs of capitulation to political pressures according to Citi analystsas Morningstar reports.

How Markets Responded

The bond market’s reaction to the news of the Trump administration’s investigation into the Fed was muted, with little movement in the front-end of the yield curve according to Citi analysts.

Gold, however, showed some strength, reflecting investor concerns over potential inflation risks. This suggests that while the market is not fully pricing in a dramatic policy shift, it remains sensitive to ongoing developments according to Citi analysis.

Goldman Sachs and Citi both project that the Fed will deliver two 25-basis-point rate cuts in 2026, likely in June and September, assuming inflation trends continue to moderate and labor market conditions remain supportive as Goldman Sachs forecasts.

What Analysts Are Watching

The timing of any rate cuts will depend heavily on upcoming inflation data and labor market developments. The Federal Reserve has signaled that monetary policy decisions will remain data-dependent, with a focus on ensuring inflation returns to its 2% target as Federal Reserve officials state.

Analysts also note that the Fed’s upcoming leadership transition may influence policy decisions. Kevin Hassett, a Trump-aligned economist, is seen as a potential successor to Powell, which could introduce a more dovish tilt to future policy arguments according to Morningstar.

Market participants are also monitoring the broader economic outlook, with Goldman Sachs forecasting U.S. GDP growth of 2.5% in 2026, supported by tax cuts, wage gains, and AI-driven productivity as Goldman Sachs projects.

The Federal Reserve’s ability to maintain credibility in its inflation targeting will be critical. If political pressures lead to a premature easing of policy, long-term inflation expectations could become unanchored, complicating future monetary tightening according to Morningstar analysis.

The coming weeks will provide key insights, with upcoming CPI and PPI data releases expected to influence the Fed’s next steps. A moderation in inflation combined with a cooling labor market could pave the way for a resumption of rate cuts in early 2026 as economic analysis indicates.

Until then, investors remain cautiously positioned, balancing optimism over potential easing with concerns over the broader political and economic landscape.