Markets and the Federal Reserve are increasingly out of sync over the path of interest rates, partly due to speculation that Fed Chair Jerome Powell will be replaced by someone more dovish.
While the Fed forecasts three cuts by the end of 2026, markets anticipate around five, based on fed funds futures pricing.
The rate currently stands between 4.25% and 4.50%, with two cuts expected in 2025 and one more in 2026 according to policymakers.
However, traders expect more aggressive easing, possibly influenced by the potential return of Donald Trump to the White House.
Trump Signals Shift, Powell’s Position Uncertain
Trump has not confirmed a replacement for Powell but has criticised him, calling him “terrible,” and suggested a more supportive figure may be chosen.
Reports indicate Trump might announce a successor by fall, creating a “shadow” chair situation ahead of Powell’s May 2026 term end.
Jack Ablin of Cresset Capital said, “Powell’s term is up in May, and he could be replaced by someone super friendly to the administration.”
White House spokesperson Kush Desai noted the administration is preparing for strong economic growth and expects monetary policy to align.
Meanwhile, Powell cautioned Congress that tariffs could stoke inflation and reiterated there’s no rush to cut rates.
The growing disparity between SOFR futures for 2025 and 2026 suggests markets are bracing for a deeper economic slowdown than Fed projections indicate.