U.S. GDP grew much faster than expected in Q3. What that means for rate cuts in 2026
Tuesday saw the release of much better-than-expected economic data , and Wall Street is weighing what that could mean for the Federal Reserve in the new year. Real gross domestic product rose at a 4.3% pace for the third quarter, far ahead of the 3.2% that economists surveyed by Dow Jones were estimating. Though the report is outdated given that it was rescheduled from its initial Oct. 30 release date due to the longest-ever U.S. government shutdown, it was enough to alarm inventors into thinking that the Fed is less likely to lower interest rates in early 2026 – which put some pressure on equity prices heading into morning trading. Stocks later recovered, and traders are still overwhelmingly pricing in two quarter percentage point cuts next year, even if the odds that the central bank will slash rates in January and March have diminished, according to the CME FedWatch Tool . Nonetheless, questions remain on whether this will actually affect the Fed’s decision making moving forward. Michael Pearce of Oxford Economics noted that it’s possible the recent quarterly services survey – which tracks the performance of the service industry – wasn’t entirely taken into account in economic forecasts for the latest GDP report, which could help explain why the beat was a lot higher than anticipated. Pearce, the firm’s chief U.S. economist, believes the Fed is going to remain in wait-and-see mode for a bit longer. “The GDP data are always slightly stale by the time they arrive, but the news that the underlying engine of the economy still appears to be in decent shape on many measures is another reason to expect the Fed to move to the sidelines early next year,” he told CNBC. “It supports the idea that the labor market will stabilize early next year and that the risks between elevated inflation and the downside risks to the labor market are in closer balance than they have been in recent months.” “Our view is that the Fed is now on hold until June,” he continued. Gary Schlossberg, global strategist at Wells Fargo Investment Institute, holds a similar view, saying that “strong” growth in the U.S. economy “further reduces the chances of another rate cut” at the Fed’s January meeting. He also said that the report “signaled unexpectedly strong momentum into the year’s final quarter, adding to the case for only a mild fourth-quarter slowdown.” However, others like eToro’s U.S. investment analyst, Bret Kenwell, weren’t so sure that the data would have any meaningful impact on the Fed’s rate outlook. “While the GDP report points to a fairly solid underlying economy, investors shouldn’t place too much weight on it when forming interest rate expectations for 2026,” he said, adding that strength in the economy alone is “unlikely to accelerate rate cuts.” “Instead, the Fed’s decisions will hinge on its dual mandate of price stability (inflation) and maximum employment (the labor market). If the labor market continues to cool and inflation remains stable or declines, the Fed is likely to ease policy regardless of how strong headline GDP appears.” Another factor at play might even benefit the rate cut path from here. “Fed rates are likely to fall much faster to neutral in 2026 with a new Fed chair coming in to run the committee,” said Chris Rupkey, chief economist at FWDBONDS, who calls for two or three quarter-point cuts ahead in 2026. “Whether the Fed chair is Hassett or Warsh or a sudden surprise, there will be extreme pressure to align with the President’s well-known call for sharply lower interest rates,” he said to CNBC. “When the dust settles, Fed rates are likely to be down to 3% neutral before the end of 2026.” The Fed lowered the benchmark overnight borrowing rate for a third time this year at its meeting earlier this month. The quarter point reduction put the federal funds target rate in a range of 3.5%-3.75%. The central bank’s closely watched “dot plot” calls for just one cut next year.
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