Fed Rate Outlook Q1 2026: Deep Dive into Inflation, Employment & Political Variables

Fed Policy Environment: Intersecting Complex Variables

The Fed faces an unprecedentedly complex policy environment in Q1 2026. With inflation deceleration stalling, Trump administration tariff policies have emerged as a new variable.

Key Macro Indicators

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Tariff Policy Inflation Impact

The Trump administration's imposition of additional 25% tariffs on Chinese products and 10% tariffs on European products is amplifying inflationary pressures.

Estimated Tariff Impact on PCE

Chair Powell stated: "Tariffs represent transitory shocks, but we will closely monitor their impact on inflation expectations."

FOMC Meeting-by-Meeting Outlook

January FOMC (Completed) - Hold

March FOMC (3/18-19) - Hold Expected (94% probability)

May FOMC (5/6-7) - Uncertain (Hold 60% vs Cut 40%)

Asset Strategy by Rate Scenario

Scenario A: H1 Hold → H2 1 Cut (45% probability)

Scenario B: Quarterly Cuts Starting June (30% probability)

Scenario C: No Cuts This Year (25% probability)

Conclusion

The Fed will likely maintain its "Higher for Longer" stance, and the market's excessive rate cut expectations need adjustment. Hedging against a stagflationary environment where tariff policies impact both inflation and growth is critical.

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