In an interview to CNBC, Minneapolis Federal Reserve President Neel Kashkari said, “I think the inflation risk is one of persistence, that these tariff effects take multiple years to work their way through the system, whereas I do think there’s a risk that the unemployment rate could pop from here.” Kashkari noted that the job market is “clearly cooling” while inflation still remains “too high.” Kashkari suggested the Fed is “close to neutral now” in terms of monetary policy.
The year 2025 began with the hope that the US Federal Reserve would aggressively cut interest rates during the year. The sentiment was dovish, as inflation had declined from a high of 9% to roughly 3%. However, opinions quickly shifted once Trump was elected and launched a tariff war with its trading partners. The US Federal Reserve only decreased interest rates at the fag end of the year – 25bps each in September, October, and December.
2026 is looking no different. The full impact of the Trump tariff is unknown, as the US government shutdown failed to collect economic data. The labour market is showing signs of weakness, which has led the US Fed to cut rates by 75bps last year. The labor market is softening, with unemployment increasing to 4.6% in November and employers adding only 64,000 jobs.
The latest U.S. CPI data for November 2025 indicates a year-over-year inflation rate of 2.7%, with core inflation at 2.6%. Both figures are slightly below expectations, suggesting a cooling trend, although shelter costs remain high.
Challenges in 2026
The Federal Reserve is facing challenges in 2026, with mixed economic signals and the impending appointment of a new chair by President Trump. Analysts anticipate interest rate cuts in response to weakening economic indicators, raising questions about the new chair’s approach and the consensus among Federal Open Market Committee members.
In a nutshell, inflation has not been tamed yet, but the job market is asking for more aggressive rate cuts. The pressure on the US Federal Reserve is mounting as Chair Powell is set to retire in May 2026.
US Fed in 2026
Fed Governor Chris Waller, former Fed Governor Kevin Warsh and Kevin Hassett, are the front-runners for the post of the US Fed chair after Powell retires in May 2026. His term as a Fed board member ends in 2028.
2026 is likely to witness a lot of political interventions in the way the US Fed works. The next chair, a Trump nominee, may want to be more aggressive in reducing the cost of borrowing in the economy, but faces resistance from other board members, who may not like to undermine the central bank’s independence. The US Fed’s monetary policy aims to balance the dual goals of inflation management and employment, ensuring neither is sacrificed for the other.