What to expect from the Fed in 2026

Heather: Hello, and thank you for joining us for another episode of Treasury Market Minute, I'm Heather Froehlich, I am the national sales manager of state treasury pools at Federated Hermes and today I'm delighted to have with me Sue Hill senior portfolio manager and head of our government liquidity group here at Federated. Thanks for joining us Sue.

Sue we are currently on the heels have a very recent FOMC meeting can you give me your perspective on how you think that meeting went and what we can expect into 2026?

Sue: Happy to so again on the heels of a meeting at the Fed voted to lower interest rates by 25 basis points lowering the Fed funds target range to the current range of 3.5 to 3.75, that was all expected from our perspective and the market was certainly positioned for it it was a little bit on the contentious side from a meeting perspective there were two dissents in favor of no move and one dissent in favor of a larger 50 basis point move and so if you go back in time that's that's pretty significant in terms of overall overall fed fed outcomes that that level of dissent

and chair Powell you know dismissed that by saying it's you know kind of consistent with the balance of the of risk that the Fed you know currently has moving forward I think the Fed at this meeting through their actions and their words and their actually changed to the official statement from the meeting sort of moved to the sidelines right they think monetary policy is in a pretty good place it's plausibly neutral and that they're going to be watching the data closely for more signals as to what you should do going forward so I think we enter 2026 with the Fed on the sidelines watching economic data to to to guide their path forward in terms of of policy that data is a little bit messy right so we're on the heels of a government shutdown the longest on record

you know the shutdown obviously has ended but the economic data still distorted and the Fed doesn't have a clear picture of what's going on so from our perspective one of the important things in the beginning part of this year is watching that data as it becomes more clean for signals as to what the path of policy will be going forward we expect modest additional easing in 2026 maybe 25 to 50 basis points or so eventually the Fed will reach a 3% terminal rate in our minds and stay there for you know for a period of time.

Heather: Thank you another question on fed independence this theory of the Fed being independent is in the media a lot lately and how do you see that playing out in 2026?

Sue: It has been an interesting year obviously the Fed and and chair Powell in particular has been under a lot of criticism throughout the course of the year now his term as chairman is up in May of 2026 his term on the FOMC as governor last longer than that so it remains to be seen as to when his his chair position is up whether he opts to stay on the FOMC or not that would be very unusual in historic terms but we're in kind of an unusual period of time with respect to the Fed the other thing or that we're watching closely is who his replacement might be there have been a number of candidates interviewed by the White House and the Treasury Secretary and we think they've narrowed down their choices to just a few and we should hear who that shadow

effectively shadow chair will be early in 2026 and then Powell's ultimate replacement there's another spot on the Fed that will be open in January of this year for a new fed governor so there's the potential for additional influence that way as well and then we have a normal rotation of Federal Reserve Bank presidents that takes place as well so a lot of moving pieces on the Fed could look a little bit different than we're used to seeing the extent of influence by the White House by the administration really depends on who's chosen for that top spot and how well the market really reacts to that.

Heather: Well that's it for today thank you sue for your valuable insight this concludes our session of the treasury market for today we thank you for joining us and we look forward to seeing you again here.