What's in store for the Federal Reserve?

The US central bank is facing growing political pressure amid speculation over Chair Powell’s successor. With faster rate cuts potentially on the table, markets have been basking in the dovish glow. But, in time, consumers may thank those policymakers who tried to keep smouldering inflationary fires under control.

01 December 2025

While everyone in the UK has been focused on the Budget and its fallout, Stateside, the Federal Reserve (Fed) has come under renewed spotlight.

Specifically, reports last week suggested that director of the National Economic Council Kevin Hassett has been tipped to take over from Jerome Powell as the next Fed Chair. On some betting platforms Hassett is now the outright frontrunner, although existing Fed governor Waller, past governor Warsh and BlackRock senior manager Rick Reider are also in the running. The fact that Treasury Secretary Scott Bessent has excluded himself from the contest is neither here nor there – whoever becomes chair in May 2026 will in large part be chosen for their willingness to cut interest rates (currently at 4%* for the upper bound) in line with the President’s frequent outbursts since taking office earlier this year. The prospect of a newly dovish Fed explains much of the stockmarket’s resilience amid ever-growing concerns of an AI bubble. But it does also present a more significant challenge in the controlling of inflation.

Uncertainty over tariffs already threatens price hikes for US consumers while the crackdown on immigration at the border goes some way to explaining why US job additions have been softening in recent months as the economy literally runs out of workers. This could in turn add to wage pressures in an economy that has historically relied on foreign workers to clean restrooms, pick fruit and wait at tables. Unsurprisingly then, US inflation, as measured by the Consumer Price Index (CPI), is running at 3.0%*, 1.0% above its target, and so a rate cut from here is hardly obvious. This is where the political pressure on the Fed introduces a certain irony. Since the Greenspan era, voting at the Federal Open Markets Committee (FOMC) has broadly been a case of ‘follow the Chair’, but this year has seen a break in that tradition, with committee members increasingly going their own way. The last meeting in October saw “many” participants vote for leaving rates unchanged, according to the published minutes, even though the majority did secure a rate cut in the end. While it’s easy to paint a picture of an increasingly dovish Fed, particularly from May next year, constant interference with the office of Fed Chair has ignited in outraged participants a newly independent streak. The markets may be enjoying the dovish narrative for now but US consumers – who ultimately drive the economy – may in time be more grateful for those militant committee members keeping inflation under control.

Implied Fed Funds rate for early 2027 has fallen – but is this really the way to go?

From 09 August to 25 November 2025

Julian Howard is Chief Multi-Asset Investment Strategist at GAM Investments. This blog represents the views of GAM’s Multi-Asset team.