Finish Strong, Start Steady

PUBLISHED JANUARY 2026

At the close of the last meeting of the Federal Open Markets Committee, the board signaled there would be just one key interest rate cut in 2026—even though the Fed funds futures market expects two key interest rate cuts, due in part to a new chairman taking over next May. 

When Jerome Powell’s time in that seat ends, who might replace him? Kevin Hassett is currently the favorite to do so. The Wall Street Journal reported that Hassett indicated that if confirmed, he would rely on his own judgment and would not bow to political pressure over cutting interest rates. Of course, Hassett had to say that to get confirmed by the Senate. However, Hassett added that there is “plenty of room” to cut rates in the months ahead.

Apparently, his views align with those of President Trump—arguing that interest rates need to come down to stimulate housing and other rate-sensitive sectors of
the U.S. economy. When asked whether he would listen to Trump if the president took to Truth Social to pressure him to cut rates, Hassett replied he would “Do the right thing.” Hassett is mastering the “double talk” that all Fed chairmen must use from time to time. 

During Powell’s recent news conference, he acknowledged that the housing market remained weak. But he also stressed that the Fed was “well positioned” moving forward. Powell added “Job creation may be negative” as well as “We think there’s an overstatement in these Labor Department numbers.” That surprisingly dovish comment helped further boost stocks and bonds. 

Before assuming anything, it should be added that the latest news on the president’s choice for Fed chair, indicated that Kevin Warsh was also a top contenders. In addition, Chris Waller will also be interviewed again by Trump, so he may still be in the running. From a market perspective, Waller might be the top pick, as he is a known quantity inside and outside the Fed, he also has credibility and knows how to build consensus. 

As an aside, now that Powell has admitted he does not entirely trust the jobs data, I am wondering whether he might also distrust other economic data. 

Inflation is the primary constraint against further rate cuts. And, because we measure inflation with a focus on the year-on-year rate, which is effectively a trailing 12-month look back, the Fed will not likely continue cutting until the biggest increases in response to tariffs drop out of the calculation (without new increases coming in). 

Most investors have experienced market crashes or roller-coaster rides. We tend to ask no questions during the long and gentle market uptrends. We open our accounts, see green, feel comforted, and move on. But when things turn volatile, we see red, feel unsettled, and then seek better answers. We could fill oceans with speculation over why markets do what they do, but reasons are rarely as important as results. 

Early November’s dip was a case in point. Stocks sank, and the news coverage pushed investors who were already questioning the AI trend to fear an “AI Apocalypse.” True, some companies were overspending, and data-center growth is too far away to justify current valuations, but while a correction sounded reasonable, long-term investors that I know did not sell. Now, a few weeks later, markets are soaring again.