Effective Federal Funds Rate, 30-Year Fixed Rate Mortgage, and 10-Year Treasury Bond Yield October 2016 – October 2025 (Sources: Board of Governors of the Federal Reserve System (US); Federal Reserve Bank of New York; Freddie Mac via Federal Reserve Economic Database)
Federal Reserve policy in 2026 and interest rate changes are subject to much uncertainty. Further interest rate changes will be a function of inflation and labor market strength resulting from economic growth. The Federal Reserve strives to act in a nonpartisan, independent manner to implement policies for the long-term benefit of the U.S. economy. Ultimately, providing the Federal Reserve maintains its independence, policy and interest rate decisions will be guided by their dual policy mandate of achieving maximum employment and price stability. The current chairman, Jerome Powell, began serving his first term in 2018 after being nominated by President Trump and confirmed by the Senate. He received a subsequent term after being nominated by President Biden and confirmed by the Senate in 2022. Chairman Powell’s term expires in May 2026. Given the pending chairman change in 2026, the influence of the executive branch on monetary policy and autonomy of the Federal Reserve remains to be seen. Summary 2025 was quite a year for the United States economy, with tariffs being the key driver in the Trump Administration’s economic policy. 2025 was the kick-off for tariffs, but in 2026 the long-term effects may begin to be realized with continued economic and legal uncertainty arising from volatile tariff policies. Several economic factors contributed to an evolving K-economy, with an increasing differential between the income and wealth of upper- and lower- income households. That trend is likely to continue in 2026. The United States economy had mixed results in 2025. By historical standards, the unemployment rate remained relatively low, but the labor market softened and the unemployment rate increased. October job losses hit a 22-year October high. The job market for young people was particularly difficult, with the unemployment rate approaching 10%. The softening labor market and impact of tariffs raises the uncertainty for consumer spending in 2026. Although consumer spending continued to drive economic growth in 2025, growth in consumer spending was significantly greater for higher income households relative to lower income households. Housing prices have moderated, but home affordability remains difficult for many American households. Although it lagged the performance of several foreign stock markets, the U.S. stock market reached record highs in 2025, shrugging off economic concerns. The stock market was spurred by AI stocks, but relatively high valuations add to uncertainties for 2026. The softening labor market spurred the Federal Reserve to cut interest rates, despite an uptick in inflation and the long-run uncertainty of the impact of tariffs on prices. Tariffs, inflation, consumer spending, the stock market, and Federal Reserve policy always contain some measure of uncertainty, but that uncertainty ramps up significantly in 2026.
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Center for Business and Economic Insight
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