Limbo for Longer: Don’t Expect More Fed Rate Cuts Before Mid-2026

Core Viewpoint - The Federal Reserve is unlikely to cut interest rates in the near term, with a consensus among experts that rates will remain steady in upcoming meetings due to mixed economic signals and ongoing inflation concerns [1][2][5]. Economic Indicators - The US economy grew at an annualized rate of 4.4% in Q3 2025, the fastest pace in two years, driven by strong consumer spending, although the labor market showed weakness with fewer jobs added in December than expected [4]. - Inflation decreased to 2.7% in December from 2.9% a year ago, but remains above the Fed's target of 2% [4]. Federal Reserve's Position - Most Fed members prefer to wait for more economic data before making decisions on interest rates, particularly regarding inflation and labor markets [2]. - The Fed is balancing the need to cool inflation without increasing unemployment, complicating the decision-making process [3]. Future Rate Predictions - Bank of America predicts potential rate cuts in June and July 2026, while Goldman Sachs also anticipates two cuts of 25 basis points during the same period [6]. - J.P. Morgan Global expects the Fed to maintain current rates for the rest of the year, with a possible hike in Q3 2027 if the labor market strengthens [6]. Housing Market Insights - The average rate on a 30-year fixed mortgage fell to 6.06%, the lowest since September 2022, which could improve housing affordability if the Fed cuts rates later [7]. - However, mortgage rates are influenced by the 10-year Treasury yield, which is expected to remain stable despite potential Fed cuts [8]. Market Reactions - Historically, the second year of a rate-cut cycle has been positive for stocks, with the S&P 500 averaging a 6.2% increase during such periods [10]. - Existing bonds become more attractive when rates are cut, as lower borrowing costs can stimulate economic activity [11]. Bond Market Dynamics - The US Treasury market faced a selloff due to geopolitical tensions but stabilized after threats of a trade war diminished [12].