Moody's Mark Zandi Makes a Contrarian Fed Call: Three Rate Cuts Before Midyear

Mark Zandi has made a career of bucking consensus when he believes the data warrants it. Now, the chief economist of Moody's Analytics is doing it again with a Federal Reserve forecast that puts him sharply at odds with both Wall Street projections and the Fed's own guidance.

Zandi expects the Federal Reserve to cut interest rates three times—by a quarter percentage point each—before the midpoint of 2026. That would bring the federal funds rate down from its current 3.5-3.75% target range to approximately 3.0% by June, a trajectory far more aggressive than what markets are pricing.

A Lonely Position

The gulf between Zandi's forecast and market expectations is striking. The CME Group's FedWatch tool currently points to just two rate cuts in all of 2026—one in April and one in September. The Federal Reserve's own December dot plot suggests the median policymaker expects only a single quarter-point reduction for the entire year.

Even more hawkish voices exist. Torsten Slok, chief economist at Apollo Global Management, believes the economy will prove too resilient for the Fed to cut much at all, projecting just one reduction ahead.

So what does Zandi see that others don't?

The Labor Market Argument

"The decision to ease monetary policy further will be driven by the still flagging job market, particularly in the early part of 2026," Zandi wrote in his latest outlook. "Companies won't rush to hire—they're still spooked by recent changes in trade and immigration policy and want stability before adding to payrolls."

Zandi points to a labor market that, while not collapsing, has clearly lost momentum. Job growth slowed significantly in the second half of 2025, with employers adding roughly 150,000 jobs per month compared to more than 200,000 earlier in the year. The unemployment rate, while still low by historical standards, has drifted higher and Zandi expects that trend to continue.

"Businesses are dragging their feet on hiring. That means job growth will stay soft, keeping unemployment climbing and putting pressure on the Fed."

— Mark Zandi, Chief Economist, Moody's Analytics

Friday's December employment report will provide the latest data point, with economists expecting job gains of around 140,000—what would cap the weakest year for employment growth since 2009 if projections hold.

The Political Pressure Factor

Zandi's forecast incorporates a factor that many economists are reluctant to discuss openly: political pressure on the Federal Reserve. With Fed Chair Jerome Powell's term expiring in May and President Trump expected to announce his nominee for the position this month, the composition of monetary policy leadership is about to shift significantly.

"Federal Reserve independence will steadily erode as the president appoints more members to the Federal Open Market Committee, including the Fed chair in May," Zandi wrote. "Given the approaching midterm congressional elections, the political pressure on the Fed to lower rates further to support economic growth is likely to intensify."

This is uncomfortable territory for economic forecasting, which typically assumes central bank independence. But Zandi argues that ignoring political dynamics would be analytically naive given the current environment.

The Inflation Complication

Not everyone is convinced. The most obvious counterargument to aggressive Fed easing is inflation, which remains stubbornly above the Fed's 2% target. The Consumer Price Index rose 2.7% year-over-year in November, with core CPI at 2.6%.

Minneapolis Fed President Neel Kashkari, who becomes a voting member of the FOMC in 2026, has been vocal about his concerns. "I think inflation is still too high," Kashkari said in recent comments. He noted that the economy has consistently defied expectations of slowing: "Over the last couple of years, we kept thinking the economy is going to slow down, and the economy has proven to be far more resilient than I had expected."

The FOMC's rotating voter composition adds another wrinkle. In 2026, the presidents of the Federal Reserve Banks in Cleveland, Philadelphia, Dallas, and Minneapolis gain votes on the committee. Cleveland's Beth Hammack has indicated she prefers holding rates steady until spring—a hawkish tilt that could limit the Fed's appetite for aggressive cuts.

The Tariff Wild Card

Complicating any Fed forecast is uncertainty about trade policy. With average tariff rates at their highest level since the 1930s and the Supreme Court weighing the legality of President Trump's emergency tariff powers, the inflation outlook is unusually murky.

Zandi acknowledges this uncertainty but notes that tariff effects cut both ways. While higher import prices can boost inflation, the uncertainty itself may be suppressing business investment and hiring—factors that could push the Fed toward easing.

What the Fed Is Weighing

• Labor market: Weakening job growth and rising unemployment
• Inflation: Above target but potentially moderating
• Trade policy: Tariff uncertainty affecting business decisions
• Financial conditions: Stock market at records, credit spreads tight
• Political dynamics: Leadership transition and election-year pressures

What This Means for Investors

If Zandi is right, the implications for portfolios would be significant. More aggressive rate cuts would likely boost bond prices, support equity valuations, and potentially weaken the dollar—a reversal of some trends that dominated late 2025.

However, his track record, while strong, isn't perfect. Forecasting Fed policy is notoriously difficult, and the central bank has surprised markets in both directions over the past several years.

Jeffrey Roach, chief economist for LPL Financial, offers a middle-ground view: "I expect some bumpy inflation readings over the next few months but see inflation falling in 2026, opening the door to a few more rate cuts." That's more cuts than the Fed's dot plot suggests but fewer than Zandi is forecasting.

For investors, the key takeaway may be less about the exact number of cuts and more about the direction of uncertainty. With credible economists making cases for anywhere from one to three or more rate reductions, positioning for a range of outcomes may be more prudent than betting heavily on any single scenario.

The first major test comes January 29, when the FOMC announces its first policy decision of 2026. Markets universally expect rates to remain unchanged at that meeting—but the Fed's statement and Powell's press conference could offer crucial signals about what comes next.