Bond investors are increasingly confident that the Fed will cut rates next year, with the possibility that the new Chair will continue the easing policy in line with Trump's trend.
The SOFR futures rate spread between 2025 and 2026 has surged, reflecting expectations of deeper future rate cuts, especially after Trump publicly criticized Chairman Jerome Powell.
- Market forecasts strong Fed rate cuts in 2026 due to political pressure and leadership changes.
- Trump and potential Fed Chair candidates lean towards rate cut policies to support growth.
- Investors have adjusted portfolios and trading strategies based on a new Fed Chair supporting rate cuts.
What Does the Market Predict About Fed's Rate Cut Trend in 2026?
The spread between 2025 and 2026 SOFR Futures Contracts reflects rate cut expectations during this period, according to Bloomberg.
In recent months, this difference has tended to expand due to the strong US economy and delayed rate cut timing. However, after Trump intensifies criticism of Powell, the rate cut prediction level has increased from 25 basis points in April to around 76 basis points now.
This demonstrates investors' growing confidence that Powell's replacement will tend towards a more accommodative policy to meet the President's demands.
"Whoever comes in will be inclined to lower rates because the economy might weaken next year, making it easier for the Fed to lower interest rates." – Ed Al-Hussainy, Global Interest Rate Strategist, Columbia Threadneedle
Ed Al-Hussainy, 2025, Bloomberg
How Do Political Pressures Impact Fed Policy?
Powell is facing pressure from Republican leaders for not agreeing to cut rates quickly, amid concerns that tariff policies could increase inflation.
Many politicians have also criticized the recent renovation costs of the Fed's headquarters. These moves reflect political tensions affecting the Fed's monetary policy decisions.
Future Fed Chair and current Trump-appointed members like Christopher Waller and Michelle Bowman have expressed support for potential rate cuts, even at the policy meeting at the end of July.
Who Might Replace Powell and What Will Be the Impact?
Potential candidates like Kevin Hassett and Kevin Warsh both support rate cut policies. The chance of a cut in September is around 58% according to Fed funds futures.
Trump is expected to announce a new Chair selection in the fall, influencing policy elections in the coming period and creating market confidence in a more accommodative policy.
"I predict a regime change next year: the Fed may maintain its stance this year, but when new appointments begin, resistance will weaken." – Philip Marey, Senior Strategist at Rabobank
Philip Marey, 2024, Rabobank
Investment Strategies and Asset Market Reactions to Potential Rate Cuts
Asset managers and Wall Street analysts have adjusted investment portfolios, anticipating various scenarios when Powell might leave his position.
Jordan Rochester of Mizuho Bank noted that betting on the SOFR rate spread has been profitable by accurately predicting the Fed's easing trend, mainly due to the potential new Chair's inclination towards rate cuts.
This market reaction demonstrates the massive influence of political factors and leadership expectations on US monetary policy.
Frequently Asked Questions
How Much Will the Fed Cut Rates in 2026?
Forecast is around 76 basis points of rate cuts based on SOFR Futures Contracts, a significant increase from 25 points earlier this year.
Who Are Potential Candidates to Replace Fed Chair Jerome Powell?
Kevin Hassett, Kevin Warsh, and members like Christopher Waller and Michelle Bowman are considered candidates likely to support rate cuts.
How Do Political Pressures Impact Fed's Monetary Policy?
Pressure from President Trump and GOP leadership provides leverage for rate cut policies, especially as the economy shows signs of slowing down.
When Will Trump Announce the New Fed Chair?
Expected in the fall this year, before a member's term ends in January of the following year.
How Is the Market Reacting to Potential Fed Policy Changes?
Investors and asset managers are gradually restructuring investment portfolios expecting rate cuts in 2026.
