KBRA Financial Intelligence

Fed’s 2026 Forecasts Face Uncertain Leadership Transition

Reviewing the Fed’s 2025 and 2026 Projections

After holding steady throughout the first eight months of 2025, Federal Open Market Committee (FOMC) members voted to slash rates by a cumulative 75 basis points (bps) throughout their final three gatherings of 2025. That includes last week’s December 10 meeting, where the committee also released its latest Summary of Economic Projections (SEP), containing median forecasts for GDP growth, inflation, unemployment, and the benchmark fed funds rate throughout the next several years.

Based on last December’s SEP, the median Fed policymaker expected 2025 core Personal Consumption Expenditures (PCE) inflation to run at 2.5% throughout the year, which materially underestimated the realized level of core inflation at 3.0%. Despite resilient price pressures, GDP growth trended lower—and unemployment higher—than expected in 2025, which helps to explain the FOMC enacting three rate cuts, instead of the two it had previously projected for the year.

Fed Shakeup to Accelerate in New Year

Looking ahead, this December’s median projection for 2026 implies that only one rate cut is expected for the year, which is less dovish than current market expectations. According to CME’s FedWatch tool, fed funds futures traders are currently positioning for an almost 75% probability of two rate cuts or more in 2026. This discrepancy can be partially explained by the fact that the composition of Fed policymakers providing forecasts in the FOMC’s latest projection materials is likely to change materially throughout 1H 2026.

The first December 2025 FOMC participant facing the end of their term on the Fed’s Board of Governors is Stephen Miran, whose term ends on January 31. Having only been appointed to the board by President Trump in September to serve out the remainder of former Governor Adrianna Kugler’s term following her early resignation, Miran’s tenure will be short, but emblematic of the monetary policy outlook the President will be looking for in future appointments to the board. In the three FOMC meetings that Miran has participated in so far, he dissented from the decision of the committee to cut rates by 25 bps in all three, opining that rates should have been cut by 50 bps at each meeting instead.

Miran’s eventual replacement may ascend to the role of chairman by May, replacing current Chair Jerome Powell upon the impending expiration of his term in that role. KBRA Financial Intelligence (KFI) has analyzed the ongoing shake-up of the Fed’s seven-seat Board of Governors and the increasing influence of the vocally dovish White House over the board, noting there is a chance that President Trump may be able to nominate three new governors in the year ahead.

Although Powell’s tenure as chair is entering its final stretch, he does have the option to remain on as a Fed governor until January 2028. However, it has been common for many chairs, including Powell’s last two predecessors in Ben Bernanke and Janet Yellen, to resign from the board following the end of their chairmanship. If Powell follows such precedent, it will create an opportunity for President Trump to not only select a new chair, but to also add yet another new governor to the board.

Further, the White House continues to pursue an attempted firing of Governor Lisa Cook, having issued an order of removal for her last August. That order has been blocked by a federal court for now, but will advance to the Supreme Court for further adjudication in January. While Fed governors cannot be fired without cause, no governor has ever before been subject to such action. As such, the level of conduct that is sufficient for a governor’s dismissal is somewhat ambiguous and will need to be adjudicated. In our recent webinar, Fed in Flux: How the Banking Sector Will be Impacted, KFI analyzed relevant Supreme Court precedent and ongoing cases before the court, which may weigh on a final decision in Trump v. Cook.

Bank Income Has Benefited From Fed Easing

Fed expectations for interest rates carry significant implications for banks, whose lending profitability—as measured by metrics like net interest margin (NIM)—relies on their ability to fund long-term lending using deposits acquired at short-term rates. Despite Fed cuts at the short end of the yield curve throughout 2H 2025, the longer end has remained relatively buoyant throughout that period, steepening the curve. As KFI noted in our most recent Quarterly Banking Overview, a steadying of deposit costs amid continued growth in NIMs has allowed the average nontax equivalent NIM among U.S. banks to rebound.

If Fed projections for strengthening growth prospects become a reality, the economic expansion could not only bolster long-term yields but also support robust loan growth. In 3Q 2025, total loans extended by banks surpassed $13.2 trillion, growing at a rate of 4.7% year-over-year (YoY)—the fastest pace of annual loan growth in over two years.

KFI has also noted that the Fed’s continued easing path is likely to bring down funding costs—potentially boosting the profitability of lending even further. Bank deposits have surged to all-time highs recently amid a transformation of the money supply that is likely to bolster the growth of M1 money, largely composed of banks’ noninterest-bearing liabilities. Historically, lower rates tend to boost demand for liquidity over yield, slowing or reversing the accumulation of interest-bearing liabilities such as time deposits. Instead, demand deposits and other checkable deposits, which typically pay no interest or offer variable rates that can be adjusted downward, tend to grow more quickly.