Federal Reserve, Powell face challenges in 2026

The 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.

Still, 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…