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Wall Street Economist Predicts Wider-Than-Expected Fed Rate-Cut Window by 2026

  //stocks-investing.news-articles.net/content/202 .. r-than-expected-fed-rate-cut-window-by-2026.html
  Published in Stocks and Investing on Sunday, December 21st 2025 at 4:21 GMT by Investopedia
      Locale: New York, UNITED STATES

Wall Street Expert Predicts Wider‑Than‑Expected Rate‑Cut Window for the Fed by 2026

In a recent piece on Investopedia, a seasoned Wall Street economist argues that the Federal Reserve has considerably more leeway to cut interest rates than the majority of market participants anticipate, even as early as 2026. The article pulls together data from the Fed’s latest “dot‑plot” projections, recent inflation trends, and the trajectory of the U.S. economy to build a case that a more aggressive tightening schedule may be a misreading of the policy’s true path.

The Expert and the Thesis

The expert—identified in the article as Mark L. Roper, Senior Economist at a major investment bank—has a long history of forecasting monetary policy. Roper’s central thesis is that while the Fed’s “forward‑guidance” signals a steady rate hike path until 2024, the underlying economic fundamentals suggest a “soft‑landing” scenario that would allow for significant cuts in the second half of 2026.

According to Roper, this optimism is anchored in:

1. Inflation’s Persistent Decline – U.S. CPI growth is moderating, and inflation expectations, as measured by the 5‑year breakeven rate, have dropped below the Fed’s 2% target for the first time in over a decade.
2. Labor Market Dynamics – While headline unemployment remains low, wage growth has begun to flatten, suggesting that labor‑market slack is increasing even if headline figures lag.
3. Financial‑Sector Stability – Recent data indicate that the Fed’s balance sheet is shrinking at a healthy pace, and stress tests continue to show resilience even under severe shock scenarios.

Roper contends that these factors collectively create a “room for rate cuts” that most market models fail to capture because they treat the Fed’s policy stance as largely “tight” through the mid‑2020s.

Fed Projections and the “Dot‑Plot” Gap

A key element of Roper’s argument is the comparison between the Fed’s dot‑plot and the Taylor‑Rule baseline. The dot‑plot, published by the Federal Open Market Committee (FOMC) after every policy meeting, shows where each member believes the target federal funds rate should end in 2024‑2026. The current dot‑plot shows an average final rate of 5.0% for 2024, climbing to 5.5% in 2025 and 2026.

Roper points out that, according to the Taylor Rule—a model that sets rates based on inflation and output gaps—the Fed’s policy stance is “over‑tightening” by roughly 25 basis points in 2024. This misalignment suggests that the Fed may feel pressure to cut rates later to keep the stance closer to the rule, especially if inflation trends continue downward.

The article also links to an Investopedia guide on “Understanding the Fed’s Forward Guidance”. This companion piece explains how the Fed uses forward guidance to anchor expectations and how market participants interpret these signals. Roper uses insights from that guide to argue that the market has largely overreacted to the dot‑plot’s high‑rate trajectory, underestimating the Fed’s willingness to back off when economic slack expands.

Inflation and Real‑Rate Dynamics

Another critical link in the article is to an Investopedia article titled “Inflation: How It Works and Why It Matters.” Roper draws on data from that guide to illustrate how inflation’s path interacts with real rates. He notes that real rates (nominal rates minus inflation) are projected to remain positive for the next two years but may drift towards neutrality by 2026 if inflation continues to decline.

He cites the Federal Reserve’s “Inflation Outlook” reports, showing that the Fed’s 2024 projection for CPI growth has fallen from 3.8% to 3.0%, a 0.8‑point drop that signals a significant cooling effect. This cooling, he argues, will reduce the need for further tightening, opening the door for rate cuts.

Labor Market and Wage Growth

The article also references a Bloomberg story linked within the Investopedia piece, which tracks U.S. wage growth rates. Roper highlights that the latest data show wage growth at just 2.5% YoY, below the 3.5% that had driven previous inflation surges. He suggests that a deceleration in wage growth signals the labor market is moving from “tight” toward “balanced,” again reducing the Fed’s justification for keeping rates high.

Financial Stability and the Fed’s Balance Sheet

Financial‑sector data is a further pillar of Roper’s argument. The Investopedia article links to a report from the Federal Reserve Bank of St. Louis on the Fed’s balance‑sheet normalization. Roper points out that the Fed has successfully reduced its holdings of Treasury and mortgage‑backed securities by over $200 billion in the past year, which indicates a healthy pace of tightening that can be reversed more smoothly than markets expect.

Market Reaction and Model Discrepancies

Finally, the article discusses how market models often assume a more rigid policy path. Roper explains that many models—especially those used by asset managers—tend to weigh the Fed’s policy stance heavily, underestimating the possibility of a policy shift. He references the Investopedia article on “Monetary Policy Models and Their Shortcomings,” which details how these models often fail to incorporate real‑time data on inflation expectations and labor‑market slack.

Take‑Away for Investors

• Fed’s Rate‑Cut Window May Open Earlier: Roper’s analysis indicates that by late 2026, the Fed could be in a position to cut rates if inflation continues to cool.
• Watch Inflation and Wage Data: Investors should monitor CPI and wage growth closely, as these are the leading indicators the Fed will use to gauge economic slack.
• Consider Real‑Rate Dynamics: Real rates should remain positive in the short‑term but may edge toward neutrality, influencing bond markets and asset valuations.
• Re‑examine Asset Allocation: If rate cuts are on the horizon, bond portfolios may outperform equities, especially in sectors sensitive to real rates.

In sum, the Investopedia article challenges the prevailing narrative that the Fed’s tightening cycle will be strictly linear until 2026. By weaving together Fed projections, inflation data, labor‑market trends, and financial‑sector health, Roper offers a nuanced view that invites investors to keep an eye on the Fed’s policy pivot potential and adjust portfolios accordingly.