Moody's Zandi Sees Three Fed Cuts by Mid-2026
Mark Zandi expects aggressive Fed easing in early 2026, contradicting both market pricing and the FOMC's own projections. Here's his reasoning.
Mark Zandi thinks the Fed is about to surprise everyone.
The Moody's Analytics chief economist expects the Federal Reserve to cut interest rates three times in the first half of 2026—a quarter point at each meeting through June. That would bring the federal funds rate down to 2.75%-3.00% by summer, well below current market expectations.
It's a contrarian call. The Fed's own December projections showed just one cut in 2026 and another in 2027. Markets are pricing something similar. Zandi is betting they're both wrong.
The Case for Aggressive Cuts
Three factors drive Zandi's outlook.
First, labor market weakness. While unemployment remains historically low at 4.1%, Zandi sees cracks forming. Job openings have declined, wage growth has moderated, and the hiring rate has slowed. He believes the Fed will prioritize employment over inflation concerns as these trends develop.
Second, inflation trajectory. Core PCE has proven sticky, but Zandi expects continued progress toward the 2% target. If inflation readings cooperate in early 2026, the Fed gains room to ease without fear of reigniting price pressures.
Third, political pressure. With a new administration pushing for lower rates and Jerome Powell's term expiring in May 2026, Zandi sees institutional dynamics that favor accommodation. A new Fed Chair—likely one more aligned with White House preferences—could accelerate the cutting cycle.
How This Differs from Consensus
The gap between Zandi's forecast and market pricing is substantial.
Fed funds futures currently imply one to two cuts in 2026, with the first not fully priced until mid-year. Goldman Sachs expects a pause at the January meeting before cuts resume in March and June, reaching a terminal rate of 3.00%-3.25%. That's still more aggressive than the dot plot but nowhere near Zandi's three-cut-by-June scenario.
The December FOMC meeting revealed deep divisions among officials. The 9-3 vote split showed hawks and doves pulling in opposite directions. Zandi is betting the doves win.
His track record lends credibility. Zandi has been analyzing the U.S. economy for decades and has called several turning points correctly. But he's also been early on recession calls that didn't materialize, and the post-pandemic economy has defied many expert predictions.
What It Means for Markets
If Zandi is right, the implications are significant.
Bond investors would benefit from falling short-term rates. The 2-year Treasury yield, currently tracking fed funds expectations, would decline. Duration exposure that has underperformed could snap back.
Equity valuations would get a boost. Lower discount rates support higher multiples, particularly for growth stocks that have struggled with "higher for longer" narratives. The Wall Street targets calling for S&P 8,000 would become more achievable.
Risk assets broadly would rally. Bitcoin, which ended 2025 down 6% partly due to hawkish Fed expectations, could resume its climb. Cryptocurrencies trade like leveraged rate bets, and easier monetary policy historically supports the asset class.
Housing would stabilize. Mortgage rates have remained elevated despite Fed cuts in 2025, partly because markets don't expect aggressive easing. Three early-year cuts would change that calculus, potentially reviving transaction volume.
The Risk to the Call
Zandi's thesis requires several things to go right.
Inflation must cooperate. If core PCE stalls above 2.5%, the Fed loses justification for aggressive cuts. Recent readings have been mixed, and tariff policies could push prices higher in 2026.
The labor market must weaken enough to worry the Fed but not crash outright. A spike in unemployment would validate the dovish case but also tank equities. Zandi needs a Goldilocks scenario—soft enough to cut, firm enough to avoid panic.
Political dynamics must align. A new Fed Chair might share the White House's preference for lower rates, but institutional independence matters. Cutting aggressively to please politicians would invite criticism and potentially damage Fed credibility.
The January Meeting
The FOMC meets January 27-28. Markets expect no change—the first cut of 2026 isn't fully priced until later in the year.
But the statement and press conference will matter. Any hint that officials are more concerned about employment, or less worried about inflation, would support Zandi's view. Conversely, hawkish commentary would push cut expectations further out.
For traders, the setup favors watching incoming data rather than positioning for a specific Fed path. Payrolls, CPI, and PCE releases will move rate expectations more than any strategist's forecast. Zandi may be right about the destination, but the timing depends on numbers that haven't been published yet.
The consensus is one cut. The dot plot says one cut. Markets say one to two cuts. Zandi says three.
Someone's going to be wrong. The Fed's first half will tell us who.