The U.S. interest-rate outlook for 2026 may be far more aggressive than markets currently expect, according to Mark Zandi, who argues that the Federal Reserve could be forced into a faster easing cycle as labor market weakness, policy uncertainty, and political pressure converge. While investors and policymakers are largely bracing for a gradual path of cuts, Zandi believes the economic backdrop may leave the central bank little choice but to move sooner—and more decisively—than it currently signals.

Zandi, chief economist at Moody’s Analytics, expects the Fed to deliver three quarter-point rate cuts in the first half of 2026. That projection stands in sharp contrast to prevailing market pricing and the Fed’s own guidance, both of which imply a slower, more cautious pace of easing.

Labor Market Slippage as the Core Catalyst

At the heart of Zandi’s forecast is a labor market that continues to lose momentum. Hiring, he argues, is being restrained by lingering uncertainty around trade, immigration, and regulatory policy, making businesses reluctant to expand payrolls. While layoffs remain contained, job creation has slowed enough that unemployment is likely to continue edging higher into early 2026.

Historically, rising unemployment has been a powerful trigger for monetary easing. Zandi contends that as long as job growth fails to keep pace with labor force expansion, the Fed will be compelled to respond. In that context, rate cuts would be less about stimulating growth and more about preventing further deterioration in employment conditions.

Markets and the Fed Signal a Slower Path

Current expectations tell a different story. Futures markets tracked by CME Group suggest investors are pricing in only two rate cuts for 2026, with the first likely not arriving until spring and the second potentially delayed until late in the year. That outlook reflects confidence that inflation will remain sticky enough to keep policymakers cautious.

The Fed’s own projections are even more restrained. The so-called dot plot released in December points to just one cut over the entire year, underscoring officials’ concern that easing too quickly could reignite price pressures. Minutes from that meeting revealed a divided committee, with several members favoring patience despite acknowledging downside risks to growth.

Political Pressure and Fed Independence

Zandi also highlights a factor that markets may be underestimating: politics. President Donald Trump has repeatedly advocated for lower interest rates, and upcoming changes to the Federal Reserve’s leadership could tilt the balance toward a more accommodative stance. With the president set to appoint additional governors—and potentially a new Fed chair when Jerome Powell’s term expires in May—the composition of the rate-setting committee may shift meaningfully.

As midterm elections approach, Zandi argues, political pressure to support growth could intensify, subtly eroding the Fed’s traditional independence. While overt interference remains unlikely, the cumulative effect of appointments and public messaging may influence how aggressively policymakers respond to economic weakness.

What Investors Should Watch Next

The divergence between Zandi’s outlook and consensus expectations sets the stage for potential market surprises in 2026. If labor data deteriorates faster than anticipated, bond markets may need to reprice quickly, with ripple effects across equities, currencies, and credit. Conversely, if inflation proves more resilient, the Fed could stick to its cautious approach, leaving Zandi’s forecast premature.

The first key test arrives at the Federal Open Market Committee meeting in late January, where markets currently see only a small chance of a rate cut. Whether that probability rises in coming months will depend largely on employment trends—and on how firmly the Fed resists mounting economic and political pressures.