Rabobank believes that due to the political pressure from the midterm elections and changes in the Federal Reserve's personnel structure, the rate cuts by the Federal Reserve in 2026 may exceed market expectations.
On December 12, Rabobank senior strategist Philip Marey pointed out that to stimulate the economy ahead of the U.S. midterm elections, the Federal Reserve is expected to lower interest rates to neutral levels or even lower by November 2026, with the federal funds rate target range reaching 2.75%-3.00% by September 2026, down from the current 3.50%-3.75%.
The new chair will preside over the FOMC meeting for the first time on June 17-18, 2026, and Rabobank expects this meeting to announce a rate cut to establish the new chair's loyalty to the U.S. White House.
<img src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/31bae349-530a-475f-b2ad-1c8ac2ad22d2.png?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="" original-src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/31bae349-530a-475f-b2ad-1c8ac2ad22d2.png"/> (Rabobank predicts the Federal Reserve's rate cut path for next year)
Previously, Trump stated that he had made a decision, and the market believes that Hassett is the most likely candidate. However, Marey stated that the name of the final nominee may not be that important.
In an interview with the media on Tuesday, Trump was asked if the new chair must immediately cut rates, to which he replied, &#34;Yes.&#34; U.S. Treasury Secretary Basant is leading the selection process and has set clear goals for the next chair: lower interest rates, relax regulations, and restructure the Federal Reserve.
Rabobank warns that if the Federal Reserve ignores inflation risks and forcibly cuts rates for political loyalty next year, it could lead to long-term U.S. Treasury yields rising instead of falling. Once the market perceives an imbalance between the central bank's fulfillment of its &#34;dual mandate&#34; and political loyalty, inflation expectations may rise, pushing up the breakeven inflation rate and causing the long end of the yield curve to rise.
<h2>The Midterm Elections are Not Only a Political Milestone but Also an Interest Rate Anchor</h2>
Philip Marey emphasized in the report that the 2026 midterm elections are a key time anchor driving the Federal Reserve's dovish policy.
For those in power, low interest rates help stimulate the economy, thereby increasing the chances of electoral success. Although Trump is in his second term, if the Republican Party loses the majority in the Senate or the House of Representatives, its policy agenda will be severely constrained.
<img src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/71bce8f9-d498-4b65-aef7-d8a84e2e7adc.png?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="" original-src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/71bce8f9-d498-4b65-aef7-d8a84e2e7adc.png"/> (Trump's approval ratings since taking office this year)
The current federal funds rate, which is above neutral levels, is seen as a restrictive policy that is slowing economic growth. Therefore, to show policy effects before the midterm elections on November 26, 2026, the Trump administration needs the Federal Reserve to significantly cut rates before then.
Marey emphasized that considering the lag in the transmission of monetary policy to the real economy, rate cuts need to be completed before October 28, 2026, as the December meeting would be too late for the elections.
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Based on this, Rabobank predicts that the FOMC will lower interest rates to neutral levels or lower before the election, forecasting that by September 2026, the target range for the Federal Funds Rate will be 2.75%-3.00%.
<h2>&#34;Shadow Chairman&#34; and Board Restructuring Establish Influence</h2>
Philip Marey provides a detailed analysis of the potential changes in the power landscape within the Federal Reserve.
Once Trump announces the nomination of a new chairman, that individual will immediately become Trump's &#34;shadow chairman&#34; in practice. After the current chairman Powell's term ends on May 15, the statements of the &#34;shadow chairman&#34; will have a significant impact on the market.
The new chairman will preside over the FOMC meeting for the first time on June 17-18, 2026, and Rabobank expects this meeting to announce a rate cut to establish the new chairman's loyalty to the White House.
Additionally, the composition of the Federal Reserve Board is undergoing changes that favor the White House.
If Waller or Bowman receives the chairman nomination, they will immediately become the de facto &#34;shadow chairman&#34; as internal members of the Federal Reserve Board.
If the nominee is Hassett, Warsh, or Rieder, they may fill the seat vacated by Milan on the Federal Reserve Board, which will expire on January 31, 2026 (three days after the FOMC meeting on January 27-28).
In this case, if the U.S. Senate confirmation process progresses quickly, the chairman nominee could take office as a &#34;regular&#34; board member as early as February and participate in the FOMC meeting on March 17-18.
Even if Powell breaks tradition and does not resign from his board position after leaving office, Trump still has opportunities to strengthen control through other means, such as pressuring Cook to resign. This could lead to Trump's loyal supporters holding a majority of 4 to 3 or even 5 to 2 on the board, forming a powerful voting bloc aligned with the White House.
<h2>The Game of Inflation Expectations and Yield Curves</h2>
Philip Marey points out that if the labor market remains weak and inflation is controlled in 2026, Trump's desire for rate cuts will temporarily align with the Federal Reserve's &#34;dual mandate,&#34; which will lower U.S. Treasury yields.
However, if economic data is strong and the FOMC continues to cut rates for political reasons, the market will face risks arising from a loss of confidence in the Federal Reserve's anti-inflation commitments.
He emphasizes that more importantly, if the Federal Reserve decides to cut rates while inflation remains high, it could raise workers' inflation expectations, leading to higher wage demands and triggering higher inflation.
This policy divergence could lead to rising long-term interest rates, offsetting the easing effects of rate cuts.
Rabobank emphasizes that the Federal Reserve has decided to start purchasing short-term government bonds for reserve management beginning December 12. Although currently focused on the short end, if long-term bond yields surge, long-term bonds may also become a focal point of policy attention.
Philip Marey concluded that if inflation persists in the future, U.S. government policies such as tariff policies will play a greater role in controlling inflation

Rabobank believes that the Trump administration needs to stimulate the economy before the midterm elections next year to maintain its seats in the U.S. Congress; considering the lag in monetary policy transmission, interest rate cuts must be completed before October to influence the November elections. The Federal Reserve may lower interest rates to 2.75%-3.00% by September 2026, equivalent to three cuts of 25 basis points each. The new chairman is expected to announce the rate cut at the first meeting in June to demonstrate loyalty to the White House. Trump's nominees may form a majority of 4:3 or even 5:2 on the Federal Reserve Board

- Rabobank predicts that the Federal Reserve may lower interest rates more than expected in 2026 due to political pressures from the midterm elections and changes in leadership.  
- Senior strategist Philip Marey highlights that the Fed is likely to reduce rates to a neutral level or lower before the elections to stimulate the economy, with a target range of 2.75%-3.00% by September 2026.  
- The potential new chair's influence and the Fed's response to inflation risks could significantly impact long-term Treasury yields and the overall economic landscape.

The Federal Reserve will cut interest rates more than expected in 2026, here’s why