With Chair Jerome Powell's term expiring in May and President Trump set to name his successor, a fundamental disagreement is emerging among Federal Reserve officials about how to navigate monetary policy in 2026. On one side stands Governor Stephen Miran, who argues the central bank needs to cut rates by more than a full percentage point this year. On the other is Minneapolis Fed President Neel Kashkari, who believes rates are already close to neutral and further cuts may not be necessary.
The split reflects genuine uncertainty about where the economy stands relative to the Fed's dual mandate of stable prices and maximum employment—and it could have significant implications for financial markets, borrowers, and the trajectory of the economic expansion.
The Dovish Case: Miran's Call for Aggressive Cuts
Governor Miran made waves this week by stating publicly that the Federal Reserve will need to reduce interest rates by more than 100 basis points (one percentage point) in 2026. With the current federal funds rate target at 3.5-3.75%, that would imply a year-end rate of approximately 2.5-2.75%.
Miran's argument centers on his assessment that monetary policy remains meaningfully restrictive, continuing to weigh on economic activity even after three rate cuts totaling 75 basis points in 2025. He points to softening labor market indicators and subdued business investment as evidence that rates are too high.
"Monetary policy is restraining the economy. We've made progress on inflation, but we need to be careful not to keep rates elevated so long that we cause unnecessary damage to the labor market."
— Federal Reserve Governor Stephen Miran
The governor isn't alone in his dovish stance. Economist Mark Zandi of Moody's Analytics projects three rate cuts of 25 basis points each before midyear, citing labor market weakness, inflation uncertainty, and political pressure as catalysts for Fed action.
The Hawkish Response: Kashkari Advocates Patience
Minneapolis Fed President Neel Kashkari represents the opposing view, arguing that the central bank is already "pretty close to neutral" and further cuts may not be warranted. His assessment suggests the Fed's December 2025 rate of 3.5-3.75% is approximately the level at which monetary policy neither stimulates nor restricts economic growth.
Kashkari's caution reflects concerns that cutting rates further could reignite inflation, which has proven stubbornly persistent above the Fed's 2% target. While headline price pressures have moderated significantly from their 2022 peaks, core inflation—which excludes volatile food and energy prices—remains elevated in certain categories, particularly services.
Market Expectations: Split the Difference
Financial markets are, as usual, pricing in a middle ground between the dovish and hawkish extremes. According to CME FedWatch data, traders see only a 16% probability of a rate cut at the Fed's upcoming January meeting, suggesting a pause is widely expected.
The Congressional Budget Office's latest economic outlook projects the federal funds rate settling at 3.4% toward the end of Trump's term in 2028—modestly below current levels but well above the near-zero rates that prevailed before the pandemic inflation surge.
Powell's Successor: The Elephant in the Room
Hanging over the entire rate debate is the question of Fed leadership. Chair Jerome Powell's term expires in May 2026, and President Trump has indicated he will name a successor this month. Treasury Secretary Scott Bessent has publicly pressured the Fed to cut rates, signaling the administration's preference for easier monetary policy.
The choice of Powell's replacement could fundamentally reshape the Fed's approach. A dovish appointee aligned with Miran's view could accelerate the pace of rate cuts, while a more cautious pick might validate Kashkari's patient approach. Markets are likely to react strongly once the nomination becomes clear.
What This Means for You
The Fed's rate path has direct implications for consumers and investors across several dimensions:
For Savers
If Miran's dovish view prevails, savers should lock in current yields on CDs and Treasury bonds while they're still available. A 100+ basis point decline in rates would significantly reduce returns on cash equivalents. High-yield savings accounts currently paying 4.5% could fall to 3.5% or lower by year-end.
For Borrowers
Homebuyers and those looking to refinance may benefit from patience. While mortgage rates don't move in lockstep with the Fed funds rate, a more aggressive easing cycle would likely push 30-year fixed rates below 6%, improving affordability. Credit card rates, which are directly tied to the prime rate, would also decline.
For Investors
Rate cuts are generally supportive of equity valuations, particularly for growth stocks whose future earnings become more valuable when discounted at lower rates. However, the reason for the cuts matters: if they're responding to economic weakness rather than normalizing from restrictive levels, stocks could struggle despite lower rates.
The Path Forward
The January Fed meeting is likely to be a non-event, with rates held steady as officials await more data on inflation and employment. March could bring renewed debate about the pace of easing, particularly if labor market conditions soften further.
For now, the Miran-Kashkari divide encapsulates the central question facing the Fed: Is current policy still restrictive enough to justify further cuts, or has the normalization process run its course? The answer will shape borrowing costs, investment returns, and economic growth for years to come.
The one certainty is that 2026 will bring heightened scrutiny of every Fed decision, every speech, and every data point. With a new chair on the horizon and fundamental disagreement about the appropriate policy stance, investors should prepare for elevated volatility around monetary policy announcements throughout the year.
