The start of 2026 is a pivotal time for US monetary policy as Federal Reserve Chair Jerome Powell nears the end of his term amid rising scrutiny and internal policy divisions, according to Wells Fargo & Co (NYSE:WFC, XETRA:NWT) analysts.
Powell’s final months as chair are unfolding during what the analysts wrote is a period of “intense pressure on the US central bank and divided views among policymakers about the appropriate stance of monetary policy.”
The analysts wrote that the labor market remains modestly on the wrong side of full employment, with private sector job growth near zero in recent months despite a small dip in the unemployment rate in December.
While the unemployment rate ticked down to 4.4%, the analysts wrote that it remains above most estimates of the longer-run natural rate, signaling lingering slack in labor demand.
They added that recent cooling in the labor market has been gradual and orderly, noting that restrictive monetary policy “does not appear warranted” when labor conditions are viewed in isolation.
On inflation, the analysts noted that recent data have been encouraging, with core CPI easing to 2.6% year-over-year in December from above 3% earlier in 2025.
Although shutdown-related distortions may be temporarily depressing measured inflation, the analysts wrote that “the direction of travel for core inflation entering 2026 is clear, in our view.”
They cautioned that progress in the Fed’s preferred PCE inflation measure has been less pronounced but said underlying disinflation trends remain intact despite last year’s tariff shock.
Against this backdrop, the analysts wrote that there is scope for the Federal Open Market Committee to continue nudging policy toward neutral. They reiterated a forecast for two 25 basis point rate cuts at the March and June meetings, followed by a prolonged pause with the federal funds rate at 3% to 3.25%.
However, the analysts emphasized that “the window for additional cuts is starting to close,” citing expected fiscal stimulus, easing financial conditions from prior rate cuts, and the potential for lower tariffs to boost growth.
If labor market or inflation data run hotter in coming months, the analysts wrote that Chair Powell and his colleagues may elect to stand pat and hand over policy unchanged to the next Fed chair. They noted that the incoming chair may face skepticism from a committee that has experienced increasing pressure from the Trump administration.
Looking ahead, the analysts wrote that economic growth is expected to firm through the spring and summer, reinforcing the case for fewer or later rate cuts.
They concluded that while their base case remains two cuts in the first half of the year, “the risks to our forecast for the federal funds rate are increasingly skewed toward later and/or fewer rate cuts this year.”