Traders Expect Five 25% Cuts by 2026 as Powell's Exit Looms

Traders are now anticipating more interest rate cuts as Jerome Powell prepares to leave the Federal Reserve System. Recent market forecasts indicate that Powell’s expected departure and criticism from Donald Trump are significantly influencing these expectations. Traders now predict five quarter-point cuts by the end of 2026, an increase from the four cuts projected just last month. Trump’s repeated complaints about Powell’s slow actions have fueled the assumption that the next Fed chair will reduce rates more aggressively.

Recent changes in policy tone have also influenced these projections. Officials have eased their warnings about inflationary impacts from tariffs, which previously limited the case for cutting rates. Concurrently, Trump has repeatedly criticized Powell, encouraging the view that his eventual replacement will adopt a more dovish stance. This shift in leadership expectations has prompted traders to prepare for a faster pace of monetary easing starting next year.

Matthew Raskin from Deutsche Bank noted that futures markets show the sharpest changes around mid-2026. This trend suggests investors expect steady interest rate cuts once a new Federal Reserve chair begins. Trump has indicated that he has narrowed down potential replacements to “three or four people.” In a recent post, he described Powell’s leadership as “terrible” and stressed his desire to appoint someone else quickly. The market is closely watching as the names on that shortlist gain attention.

Some of the people reportedly under consideration include Treasury Secretary Scott Bessent, former Fed governor Kevin Warsh, and current Fed governor Christopher Waller. Waller has stated that he supports interest rate cuts as early as July. Michelle Bowman, another current Fed governor, has also said that falling inflation supports earlier action. These statements have added to speculation that a shift in the Fed’s leadership and direction may happen sooner.

Analysts have started to examine how political pressure could influence these candidates. Ian Lyngen of BMO Capital Markets mentioned that candidates like Warsh were previously more hawkish. He said that prior views might not be a reliable guide in this case. Trump’s public criticism has placed more attention on the selection process, making it likely that some contenders will modify their policy positions to appear more favorable.

There are also whispers of a would-be “shadow chair,” someone who would start to provide signals for the direction of the Fed in advance of Powell’s real departure. While no decision is close at hand, according to the White House, markets already appear to be preparing for change. A leadership change might mean a faster policy overhaul than initially expected, adding yet another level of uncertainty for investors tracking Fed moves.

Despite all this speculation, Jerome Powell stood firm during recent testimony to Congress. He indicated that current conditions are not ripe for a rate cut in July. He said the Fed should be more sensitive to the impact of tariffs before taking action. May inflation ticked up to 2.4%, a bit higher than April but below what economists had projected. These figures make it harder to predict when rate cuts will actually begin, even as markets price them in increasingly.

Treasury yields have reacted to the shifting outlook. Both two- and five-year note yields have dropped to their lowest levels in two months. These movements reflect expectations of rate reductions once a new chair takes over the Federal Reserve System. Powell has not changed his stance under political criticism, but markets are positioning themselves for a different policy in 2026. With leadership changes ahead, investors continue to monitor each development closely.