After a bruising 2025, the Fed faces another slew of challenges in the year ahead

U.S. Federal Reserve Chair Jerome Powell holds a press conference following a two-day meeting of the Federal Open Market Committee at the U.S. Federal Reserve in Washington, Dec. 10, 2025.Kevin Lamarque | ReutersThe Federal Reserve heads into 2026 facing a slew of political and policy challenges, headlined by a new chair and an economy fed by both tailwinds and headwinds that will make policymakers' choices all the more important.Coming off three consecutive interest rate cuts, the central bank is expected to follow a more tepid path for the year ahead in which additional cuts could be hard to come by considering expectations for solid growth and ongoing inflation pressures.One thing does seem certain: After a year of extraordinary upheaval surrounding the Fed, 2026 looks to offer more of the same."I do think there'll be a big spotlight. There'll be lots of intrigue," said Kathy Bostjancic, chief economist at Nationwide. "There's still a lot of uncertainty that keeps the Fed in the spotlight, and probably in the hot seat too."The previous year saw the Fed come under that spotlight in ways that it never had before.As he started his second term at the White House, President Donald Trump repeatedly threatened to fire Fed Chair Jerome Powell for not being quicker to push for interest rate cuts. Around mid-year, the Fed came under fire again, this time for cost overruns at a renovation project it had undertaken at its Washington headquarters.In between, Trump tried to remove Governor Lisa Cook over allegations — as yet unproven and not even brought as formal charges — that she committed mortgage fraud. That all came against a backdrop of who would succeed Powell as chair when his term expires in May, with as many as 11 candidates considered during an interview process led by Treasury Secretary Scott Bessent. If all that sounds exhausting, consider that 2026 begins with a Supreme Court hearing scheduled for Jan. 21 to decide whether Trump has the authority to remove Cook. A week later, the Federal Open Market Committee holds its interest rate vote. At some point during the month, Trump is expected to unveil his choice for Fed chair. And Powell, cagey on the issue so far, also will have to disclose whether he plans on serving out his term on the Board of Governors that runs until January 2028.There also have been multiple dissents at recent rate votes, and new regional presidents set to come on board at the FOMC have a hawkish bent, meaning they're likely to resist additional cuts."It's still a tough spot for the Fed," Bostjancic said.Focus on policyStill, when it comes to policy, most on Wall Street expect the Fed to put the noise in the background and continue down the road of lowering its benchmark interest rate just a bit more until it gets closer to a neutral level around 3%. Neutral is considered a spot that neither boosts nor holds back economic activity, and the funds rate is just half a percentage point above where most on the FOMC see the rate landing over the long term."Chair Powell helped orchestrate three 25-basis-point rate cuts in a row. It's not as if he was standing in the way of the FOMC cutting rates," Bostjancic said. As far as further cuts go, "For us, it's [about] the economic data."Bostjancic sees the data pointing to two cuts this year, one around mid-year and another toward the end. The Fed's "dot plot" grid of expectations indicates just one cut, while outliers such as Moody's Analytics chief economist Mark Zandi and Citigroup seeing labor market weakness pointing to three.Powell and his colleagues have stood by the notion that they won't be bullied into cuts and indeed will be guided by data.Torsten Slok, chief economist at Apollo Global Management, thinks the economy will be too strong for the Fed to cut much more, seeing just one reduction ahead."The issue is that the winds are really changing for the U.S. economy," Slok said during a CNBC interview Friday.Whereas 2025 saw headwinds of tariffs, inflation and a general air of uncertainty, fiscal stimulus and a stabilizing labor market will be pushing on growth, he said."It is, in my view, looking like more that the tailwinds are beginning to accumulate and making it more difficult for the Fed to cut rates this year," Slok added.The role of AIOne wildcard will be the role that artificial intelligence plays on economic growth.Seen as both a productivity enhancer and a potential impediment to hiring, assessing the impact AI is having on the economy will be paramount for the Fed, said Joseph Brusuelas, chief economist at RSM."The Fed this year has got a real challenge in terms of communicating their strategy," Brusuelas said. "We have this massive investment flowing into very sophisticated technologies, and the Federal Reserve is going to need to communicate their basic view on what this means."After sputtering at the beginning of 2026, the economy grew rapidly in the middle two quarters and is on pace to accelerate at a 3% pace in the fourth quarter, according to preliminary data from the Atlanta Fed.In addition to helping push along the broader economy, AI-related stocks were a key highlight of another stellar year on Wall Street that saw major averages post double-digit increases.Calibrating monetary policy in that kind of environment will be tough, Brusuelas said."They're going to need to provide strategic direction for the central bank at a time when the economy is clearly pivoting towards the integration of this sophisticated technology in the production of goods and provision of services," he said. "This is a really big potential pivot around policy that needs to happen."