Global markets pricing in two more rate cuts from US Fed in 2026, says Julius Baer's Unmesh Kulkarni

US Federal Reserve Policy Review

As was widely expected in the global markets, the US Federal Reserve cut its policy rate by 25 bps in its FOMC meeting on December 10. This was the 3rd rate cut by FOMC in 2025.

However, there was a divided view in the FOMC, which voted 9:3 for the 25 bps cut, with 3 dissents – 2 hawkish dissents for ‘no cut’ and 1 dovish dissent for ’50 bps cut’.

The Fed also announced that it will resume buying of Treasury bills, starting the end of this week.

The Fed faces a difficult crossroad: continue easing to support a softening labour market, or signal caution with inflation being stubbornly high. According to the Fed Chair Jerome Powell, the Fed rate cut is driven by rising job risks amidst inflation pressures being tilted to the upside.

The US CPI has been steadily rising over the past few months and the last print came in at 3% YoY, stubbornly above the Fed’s target of 2%. According to Powell, the overshooting of inflation has been primarily due to the tariffs, which have resulted in import tax hikes. However, Powell views the tariff impact on inflation to be a one-time price increase, which will likely peak in the first quarter of next year, assuming there are no major new tariff announcements.

One challenge for the Fed has been the distortion in the economic data (inflation, growth, jobs, etc.) due to the recent extended shutdown of the US Government.

The sharp division of views within the FOMC makes it a bit challenging to gauge the likely future course of rate decisions by the FOMC, as there are differing views among FOMC members on the future direction of rates. The FOMC’s “dot plot” (chart of projections of future Fed rates by individual FOMC members) is currently indicating just one more reduction in 2026 and another in 2027.

According to Powell, the current policy environment is “unique,” marked by unusual tension between the Fed’s inflation and employment goals, and therefore today’s circumstances require a “balanced approach” under the Fed’s framework. Powell further added that no decision has been made about the January meeting and that policymakers are “well positioned to wait and see how the economy performs.”

Currently, global markets are pricing in 2 more rate cuts from the Fed in 2026. JB Global Research also continues to expect two more rate cuts by the Fed in 2026 on the back of a weakening labour market and no major acceleration of inflation.