by Calculated Risk on 12/28/2025 08:11:00 AM

Earlier I posted some questions on my blog for next year: Ten Economic Questions for 2026. Some of these questions concern real estate (inventory, house prices, housing starts, new home sales), and I posted thoughts on those in the newsletter (others like GDP and employment will be on this blog).

I'm adding some thoughts and predictions for each question.

Here is a review of the Ten Economic Questions for 2025.

6) Monetary Policy:  The FOMC cut the federal funds rate three times in 2025 from "4-1/4 to 4-1/2 percent" at the beginning of 2025, to "3-1/2 to 3-3/4" at the end of the year. The mid-range on the "dot plot" suggests many FOMC participants expect around one to two 25 bp rate cuts in 2026.  What will the Fed Funds rate be in December 2026?

As of December, looking at the "dot plot", the FOMC participants see the following number of rate moves in 2026:

25 bp Rate Moves	FOMC Members 2026
One Rate Hike	3
No Change	4
One Rate Cut	4
Two Rate Cuts	4
Three Rate Cuts	2
Four Rate Cuts	1
More than Four	1

This is a wide range of views.

Goldman Sachs economists think there will be 2 rate cuts in 2026:

"We expect the FOMC to compromise on two more 25bp cuts to 3-3.25% but see the risks as tilted lower. "

A key question: How accommodative is current policy?  With core PCE inflation at 2.8% year-over-year in September (the data for October and November is delayed due to the government shutdown) and the "neutral rate" at 1.5% would suggest a Fed Funds Rate at around 4.3% (Of course, estimates of the neutral rate vary widely). 

Currently the target Fed Funds rate range is '3-1/2 to 3-3/4' percent.  And the FOMC projections show core PCE inflation only declining to 2.4 to 2.6% by the end of 2026 (Q4-over-Q4).

However, the FOMC believes inflation will come down as the tariff pass-through fades, and also because of a further declines in housing inflation.   Asking rents have been flat for almost three years, and measures of rent (housing / shelter) are steadily declining.

If we look at recent readings over the last 6 months annualized (through September):

PCE Price Index: 2.7% 

Core PCE Prices: 2.7%

Core minus Housing: 2.6%

In Q1 2025, PCE inflation was high.  There might be some residual seasonality in Q1, so it seems likely inflation will be lower in Q1 2026, lowering the YoY measures.

The next FOMC meeting ends on January 28th, and the FOMC will likely hold rates steady at that meeting.  

Due to the ongoing weakness in the labor market, my guess is there will be 2 rate cuts in 2026 with many dissents!  We might even see the 1st ever Fed Chair dissent

As long as the Fed remains independent, FOMC policy will depend on what happens with inflation and employment in 2026.  

Here are the Ten Economic Questions for 2026 and a few predictions:

• Question #7 for 2026: How much will wages increase in 2026?

• Question #8 for 2026: How much will Residential investment change in 2026? How about housing starts and new home sales in 2026?

• Question #9 for 2026: What will happen with house prices in 2026?

• Question #10 for 2026: Will inventory increase further in 2026?