FedWatch's Ben Emons forecasts gradual Fed rate cuts in 2026

Key Concepts

• Federal Reserve (The Fed): Central bank of the United States, influencing monetary policy and market liquidity.
• FOMC: Federal Open Market Committee, the body within the Fed that sets monetary policy.
• Quantitative Easing (QE): A monetary policy where a central bank purchases government bonds or other assets to increase the money supply and lower interest rates.
• Real Interest Rate: The nominal interest rate adjusted for inflation.
• Yield Curve: A graph plotting the yields of similar-quality bonds against their maturities. A steepening yield curve suggests expectations of economic growth and/or rising inflation.
• Balance Sheet Expansion: The Fed increasing its assets, typically through bond purchases, which increases the money supply.
• Debasement Trade: Investing in assets perceived as hedges against currency devaluation or inflation (e.g., gold, silver).

Market Outlook & The Federal Reserve – A Discussion with Ben Emons

Introduction & Recent Performance

The discussion begins with a review of the market’s strong performance over the past three years, characterized by “double-digit gains” annually. However, the focus shifts to expectations for the coming year, with the Federal Reserve (The Fed) identified as a primary driver of market dynamics.

The Upcoming Fed Chair Announcement & Lisa Su Case

A significant event anticipated in the near future is the announcement of the next Fed Chair. Alongside this, a resolution is expected in “the Lisa Su case” (details of which are not provided in the transcript). These events, combined with the market’s current pricing not immediately anticipating rate cuts, create a period of considerable uncertainty.

Gold’s Performance & Real Interest Rates

Gold’s recent surge in price is attributed, in part, to the Fed’s December meeting and the resulting decline in real interest rates. Ben Emons explains that the “funds rate account[ing] for inflation” is slowly declining, making gold more attractive as an investment. The Fed’s increasing liquidity, evidenced by an expanding balance sheet (a report on which was expected that day), is also cited as a contributing factor. He predicts that this balance sheet expansion will have a broader impact on markets.

Potential Fed Chair Candidates & Market Reactions

The discussion then turns to potential candidates for the Fed Chair position, narrowing the field to “4 or 5 really sort of final candidates,” including Rick Rieder, Kevin Warsh, and Kevin Hassett. The market’s potential reaction to each candidate is analyzed:

• Rick Rieder: Described as “a friend of the markets” due to his background as a portfolio manager and trader, and his expressed interest in utilizing the balance sheet “in a more creative way to stimulate the economy.” He is seen as potentially beneficial for equity markets. Emons notes Rieder, in an interview with Scott Walker, discussed innovative uses of the balance sheet.
• Kevin Warsh & Kevin Hassett: Presented as potentially negative for equity markets. Kevin Hassett was previously reported as advocating for the removal of current Fed Chair Powell, causing market volatility. Kevin Warsh is described as being “very much against QE” and skeptical of balance sheet expansion.

Political Cycle & Market Stimulus

The conversation extends to the influence of the political cycle, suggesting a need for “stimulative” policies to remain “politically in vogue.” This pressure is expected to impact gold, the dollar, and ultimately, the Fed, particularly leading up to the midterms. The discussion highlights a cyclical pattern where these trades are expected to continue.

Steepening Yield Curve – Causes & Implications

The steepening of the yield curve is addressed. Emons attributes this to two primary factors:

1. Expected Rate Cuts: More rate cuts than currently priced into the market will lower short-term rates, deepening the curve.
2. Economic Stimulation: Lower rates will stimulate the economy, leading to increased investment (citing overnight announcements from Japan and the US regarding expedited investment) and potentially pushing up long-term rates. This is expected to contribute to GDP expansion.

The “debasement trade” – investing in assets like gold and silver as a hedge against currency devaluation – is also expected to persist due to the uncertainty surrounding the new Fed Chair’s approach and the relationship between the Fed and the White House.

Technical Terms & Concepts

• Gyrated: (Referring to the market) Experienced rapid and volatile fluctuations.
• FOMC: Federal Open Market Committee – the monetary policy-setting body of the Federal Reserve.

Logical Connections & Synthesis

The discussion flows logically from a review of recent market performance to an analysis of the key factors expected to influence the market in the coming year. The Fed’s actions, particularly the appointment of a new Chair and its monetary policy decisions (including balance sheet expansion and interest rate adjustments), are consistently presented as central to the outlook. The political cycle and its potential impact on stimulus measures are also integrated into the analysis. The steepening yield curve is presented as a consequence of these factors, signaling potential economic growth and inflation.

Main Takeaway

The primary takeaway is that the Federal Reserve will be the dominant force shaping market dynamics in the first half of 2026. The appointment of the next Fed Chair is a critical event with potentially significant implications for equity markets, depending on the chosen candidate’s policy preferences. The expanding Fed balance sheet, declining real interest rates, and the interplay between monetary policy and the political cycle are all expected to contribute to a continued “debasement trade” and a steepening yield curve.