What if the Fed doesn't cut rates in 2026?

The US economy does not appear to need rate cuts.

Investors' bets on Fed rate cuts continue to swing from day to day, driven by central bankers' remarks and economic data. The figures published last week added fresh fuel to the debate.

The January jobs report was better than expected, with 130,000 jobs created-twice what was expected by the consensus. However, economists focused more on the annual revisions. In light of those, the US economy created an average of 15,000 jobs per month in 2025. That is the weakest figure excluding recessions in twenty years.

On Friday, the January CPI (inflation index) once again surprised to the downside, with the disinflationary trend continuing. Recent economic data therefore seems to open the way for the Fed. Traders now expect two to three 25bp cuts in 2026, according to the CME's FedWatch tool.

To that, one must add Kevin Warsh's arrival in May as Jerome Powell's successor at the head of the Fed. It is known he will be under pressure from Donald Trump to cut rates. According to Warsh, rate cuts are justifiable because AI will enable a productivity boom and therefore disinflationary growth.

The Fed is well positioned

However, as many economists have pointed out since Kevin Warsh's appointment, that view is debatable. A productivity boom typically means stronger growth and therefore a higher neutral rate. As a result, there is no reason to cut rates if one expects higher productivity.

Then, as we have underlined several times, Kevin Warsh will have to convince his colleagues: he has only one vote out of the twelve voting members of the monetary policy committee. For now, the consensus seemingly forecasts a pause within the FOMC. At the last meeting, only Stephen Miran (who will be replaced by Warsh) and Christopher Waller voted in favor of a 25bp cut.

Above all, nothing indicates the US economy needs further rate cuts. Some signs of weakness in the labor market are worrying, and there are fears of a wave of AI-driven layoffs. However, the unemployment rate fell back to 4.3% in January and has never exceeded 4.5% since the economy emerged from the Covid pandemic.

Growth also remains solid. GDP is expected to rise 3% in Q4-the figure will be published by the Bureau of Economic Analysis this Friday. And 2026 should rather be a year of re-acceleration in growth, as activity slowed at the start of 2025, a consequence of uncertainty around tariffs.

There are indeed three major catalysts for the US economy in 2026. First, the elephant in the room: investment spending on AI. It was already a major contributor to growth in 2025. This year, the hyperscalers-Amazon, Alphabet, Meta, Microsoft-are planning capex of $660bn.

Second, the Fed cut rates by 75bp at the end of 2025. Monetary easing takes some time to fully filter through to the economy. But it will be a support this year.

Finally, there is expansionary fiscal policy, with Donald Trump's tax-cut plan-the One Big Beautiful Bill-passed by Congress last summer. And as the midterms approach and affordability (the cost of living) becomes the main issue for voters, further budget measures cannot be ruled out.

With these three catalysts, the risk for the US economy is more one of overheating rather than slowing. Torsten Slok, Apollo's chief economist, therefore believes it may be more a question of rate hikes than rate cuts by the end of the year.

In this context, the best solution for the Fed seems to be to adopt the same mantra as the ECB, which repeatedly insists that its monetary policy is "well positioned.”