Well, a brand new year will mark the changing of the guard so to speak in terms of voting members at the Fed. And we will get to that in a couple of days' time, so it is important to understand the dynamics of the situation especially since we're entering a rather delicate timeline for the central bank.
The Fed managed to sneak in one final rate cut for the year earlier this month. However, markets are taking on the view that the next move will need a lot more convincing. As things stand, the next full 25 bps rate cut is only priced in for June 2026 with there being ~60 bps of rate cuts priced in for the year ahead.
As we move closer to neutral, the push to cut rates will lessen but that is something that Trump doesn't really want. So, the political pressure will be there even as inflation pressures might not ease as much in the first half of the year. But once Powell is gone and we get into the second half of 2026, it might be a different story on the inflation narrative.
And if the labour market continues to soften, that will at least give the Fed some added flexibility to stick to the plot of cutting rates. Otherwise, stagflation risks are going to be a consideration instead. So, policymakers will be hoping that the backdrop doesn't develop as such.
In any case, the main cast of voting members will remain unchanged next year but the most important thing to note is that Fed chair Powell's term will be ending on May 2026.
- Jerome Powell (Fed chair)
- Philip Jefferson (Fed vice chair)
- Michelle Bowman (Fed vice chair for supervision)
- Michael Barr (Fed governor)
- Christopher Waller (Fed governor)
- Lisa Cook (Fed governor)
- Stephen Miran (Fed governor)
- John Williams (NY Fed president)
With Powell out of the equation, we'll likely get a Trump puppet in place though the race is now between the two Kevins. Hassett is one that is more aligned with Trump's views whereas Warsh is slightly more favoured by Wall Street to take over. But in any case, expect this to reflect a more dovish shift in terms of voting stance as compared to Powell - who is often a more neutral player.
Then, there's also the curious case of Miran who is expected to leave when his term expires at the end of January. So, he will at least be voting once again for the 28 January policy decision. He is a Trump puppet and has been pushing for a 50 bps rate cut since joining the fray, so don't expect that to change next month.
His replacement will likely be a permanent appointee by Trump, so don't expect any less dovishness on this one to say the least. But until one is appointed, Miran will stay on in that position. So, it's an indifferent motion really.
Everyone else on the list above tends to lean more neutral to dovish as of late, so that sort of stance is expected to continue as we get into the new year.
As for the rotating members, we are seeing a change up with the fresh names coming in being:
- Beth Hammack (Cleveland Fed)
- Anna Paulson (Philadelphia Fed)
- Lorie Logan (Dallas Fed)
- Neel Kashkari (Minneapolis Fed)
And the ones rotating out will be:
- Susan Collins (Boston Fed)
- Austan Goolsbee (Chicago Fed)
- Alberto Musalem (St Louis Fed)
- Jeffrey Schmid (Kansas City Fed)
I commented previously on the change as such:
"Hammack and Logan should be like-for-like replacements to Goolsbee and Schmid on the central bank dove versus hawk scale. And if anything, they might even be more hawkish. So, it will be a tough task to want to change their minds in pushing for stronger conviction on rate cuts."
So, that sort of keeps things as they are to what we saw in the December meeting. That at least to start the year.
But with Powell set to depart and the possible "inflation mirage" forming in the second half of 2026, it might be a case that we will see the Fed slowly turn more dovish as a whole in due time; all else being equal. A push for an earlier rate cut, perhaps in April, remains on the table as well. So, it's not to say that we will have to wait out Powell before seeing that happen.
Come what may, Trump might not get his wish of wanting rates to come down quicker. However, he will at least get a more dovish tilt out of the central bank unless we see a material shift in the economic trend for next year.
