Big Changes Are Coming to the Federal Reserve in 2026—This Is What It Means for Interest Rates

The new year will bring big changes at the Federal Reserve, with major implications for borrowing costs, the housing market, and the overall economy.

In addition to major upcoming personnel changes, Fed policymakers have signaled that further rate cuts are unlikely until the spring. That sets up a renewed showdown with President Donald Trump, who has made clear his desire for dramatically lower interest rates.

Fed Chair Jerome Powell‘s term will expire in May, and Trump is expected to announce his nominee to fill the role in early January after narrowing the list to a handful of finalists.

Before his term ends, Powell will preside over three more meetings of the Federal Open Market Committee (FOMC), the 12-member panel that sets interest rate policy. However, starting in January, there will be personnel changes, with four new regional Fed presidents rotating onto the panel.

As well, Fed Gov. Stephen Miran, a temporary Trump appointee who has pushed for swift and deep interest rate cuts, will see his term expire at the end of January. Trump may reappoint Miran, or use that vacancy to install his nominee for the next Fed chair.

The fate of Biden-appointed Fed Gov. Lisa Cook also hangs in the balance, with the Supreme Court due to hear arguments in January regarding Trump’s attempt to fire her.

It’s also unclear whether Powell will decide to remain on the FOMC as a regular governor after his term as chair expires, or step down and vacate his board seat, which he has the option to hold until January 2028.

The shake-ups will add a new layer of uncertainty at the Fed following a year of extraordinary politicization of the central bank. In 2025, Trump and his allies openly attacked Powell and demanded lower interest rates, which would reduce government borrowing costs and juice the economy.

Despite Trump’s threats to fire or sue Powell, the FOMC held its policy rate steady for the first five meetings of 2025, waiting until September to make the first cut.

Two subsequent cuts have brought the Fed’s benchmark interest rate to a current range of 3.5% to 3.75%, which is down 75 basis points from a year ago.

The Fed uses lower interest rates to stimulate the labor market, and higher rates to fight inflation, in line with the central bank’s dual mandate of price stability and maximum employment.

The interest rate set by the FOMC is the short-term rate used for overnight lending between commercial banks, and the Fed does not directly control long-term mortgage rates. However, the markets that set mortgage rates move in response to investor expectations about inflation and future Fed policy.

As of late December, CME FedWatch shows that financial markets expect the Fed to make just two quarter-point rate cuts in 2026, which would bring the policy rate to a range of 3% to 3.25%.

Bettors on the prediction market Polymarket are a bit more optimistic, giving a roughly equal probability of two cuts and three cuts in 2026.

The members of the FOMC themselves are more conservative, with the median projection from the latest “dot plot” calling for just a single rate cut. However, the dot plot also shows a wide range of forecasts for 2026, ranging from rate hikes to drastic cuts, underscoring the deep divisions on the panel.

As well, recently released minutes from the December meeting show growing hesitation about further rate cuts on the panel, with some participants saying “it would likely be appropriate to keep the target range unchanged for some time” after last month’s rate cut.

The next FOMC vote on Jan. 29 could deliver key insights by showing where the new rotation of regional Fed presidents stand on rate policy.

In 2026, the presidents of the Federal Reserve Banks in Cleveland, Philadelphia, Dallas, and Minneapolis will gain votes on the FOMC, replacing the presidents from Boston, Chicago, Kansas City, and St. Louis.

With the annual rotation, the FOMC will lose two notable “hawks” who voted against a rate cut last month: Chicago Fed President Austan Goolsbee and Kansas City Fed President Jeffrey Schmid.

However, the panel will gain new hawks in their place, including Cleveland Fed President Beth Hammack, who recently told the Wall Street Journal that she would prefer to hold rates steady until the spring.

Realtor.com® senior economist Jake Krimmel expects the Fed to hold its policy rate steady at the January meeting, despite recent consumer price index (CPI) data showing that inflation cooled unexpectedly in November.

“Questions over how the government shutdown influenced the recent unexpectedly low CPI read make me think the committee will need much more evidence that the inflation problem is fading,” he says.

Trump said last month that he planned to announce his nominee for the next Fed chair early in January, setting up the potential for a “shadow chair” who could set market expectations through the spring.

National Economic Council Director Kevin Hassett, Trump’s closest economic adviser, is seen as the front-runner in prediction markets, with Polymarket assessing a 43% probability of Hassett’s nomination as of late December.

Hassett has argued that the Fed needs to cut interest rates aggressively, saying that the boom in artificial intelligence will boost growth and put natural downward pressure on inflation.

“If you look at central banks around the world, the U.S. is way behind the curve in terms of lowering rates,” Hassett told CNBC on Dec. 23.

That argument is in line with Trump’s vision. But due to his close relationship with Trump, if appointed, Hassett would face the task of convincing markets that he is a credible and independent central banker, rather than a political pawn tasked with carrying out the president’s will.

By law and tradition, the Fed has long been structured to remain free from political influence, tasked with carrying out its dual mandate of stable prices and maximum employment.

Central bank independence is important because, historically, maintaining artificially low interest rates for political reasons often leads to runaway inflation and capital flight. Ultimately, that can drive government borrowing costs higher as investors lose confidence in the Fed’s commitment to control inflation.

“For the Fed to influence markets in general, and the long end of the yield curve specifically, it needs credibility,” says Krimmel. “Especially for investors in long-duration treasuries and mortgage-backed securities, the markets which effectively set mortgage rates, they need to know the Fed will credibly prevent runaway inflation.”

Krimmel notes that, paradoxically, the more Trump is seen as exerting undue influence over the Fed, the less ability the central bank will have to deliver the lower long-term rates that the president seeks.

“If the Fed is no longer seen as independent from partisan or presidential politics, it loses credibility with the markets—and with that, the very influence that the president so desires to exert,” he says.