Economists have projected that President Trump’s upcoming appointment to lead the Federal Reserve could quickly lead to policy disagreements, particularly over interest rate decisions. A recent analysis suggests that despite a cooling labor market, inflation is likely to remain above the Fed’s 2% target for an extended period, limiting the scope for aggressive rate cuts.
As a result, Capital Economics forecasts only a 25 basis point reduction in the federal funds rate during 2026. This restrained approach is expected to clash with Trump’s public preference for significantly lower borrowing costs. The president has previously criticized the central bank for not cutting rates more deeply, even suggesting a target as low as 1%, a level typically associated with economic downturns rather than steady expansion.
The leading candidates under consideration include Kevin Hassett, Christopher Waller, and Kevin Warsh, with prediction markets favoring Hassett at 54% likelihood. However, Hassett recently signaled a degree of independence by stating that the president’s views would carry no influence over Federal Open Market Committee decisions.
Meanwhile, strong capital investment driven by artificial intelligence is expected to sustain economic momentum. Business spending is projected to rise 6.5% in 2026 and accelerate to 7.4% in 2027 as AI integrates into industries such as finance, healthcare, and real estate. These productivity gains may help alleviate labor market pressures stemming from tighter immigration policies.
Still, Trump’s trade tariffs are anticipated to contribute to persistent inflationary pressures. While a more dovish Fed chair could advocate for faster easing, such a shift would require broader support within the FOMC. Undermining the central bank’s independence could damage its credibility, potentially pushing long-term interest rates higher.
Not all analysts share this optimistic outlook. Citi Research anticipates GDP growth of about 2% in 2026, with a softer labor market enabling the Fed to reduce rates by 75 basis points—three times more than Capital Economics’ estimate. Citi warns of a rising unemployment rate and subdued hiring, which could dampen income growth and consumer spending throughout the year.
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Trump and his new hand-picked Fed chair will clash ‘almost immediately,’ economists predict
In a note on Thursday, economists said the recent investment surge led by artificial intelligence is just the start of a multiyear boom in capital spending.
As a result, GDP with grow at a robust rate of 2.5% in both 2026 and 2027, even after accounting for a weaker job market that will slow consumption.
“With core inflation remaining above the 2% target for some considerable time, we think the Fed will cut its policy rate by only 25bp in 2026, putting the new Fed Chair and President Trump at loggerheads almost immediately,” Capital Economics predicted.
The president is considering National Economic Council Director Kevin Hassett, Fed governor Christopher Waller, and former Fed governor Kevin Warsh. The prediction market Kalshi has Hassett as the favorite with 54% odds to be picked, followed by Warsh (24%) and Waller (14%).
On Wednesday, Trump said he will name someone “who believes in lower interest rates by a lot.” A week before that, after the Fed cut rates by a quarter point to 3.5%-3.75%, he complained that it could have been “at least doubled.”
And earlier this year, Trump suggested the rate should go all the way down to just 1%, a level that’s typically consist with a recession, not an economy expanding at a healthy clip.
To be sure, the job market is showing signs of stagnation, but the AI boom will keep the economy buoyant, with incomes holding up too, Capital Economics said.
That’s as business investment should grow by 6.5% in 2026 and accelerate to a 7.4% pace in 2027, as AI adoption spreads to more sectors outside tech, like finance, real estate and healthcare.
AI-fueled productivity gains should also help offset tightness in the labor market due to Trump immigration crackdown, but his tariffs will keep inflation sticky, economists said.
Of course, Trump’s Fed pick could do his bidding and push for more rate cuts, but that will require other policymakers to go along. And even if they do, the aggressive easing will eventually backfire.
“Admittedly, the appointment of a new Fed Chair could trigger a bigger wave of policy loosening, but only if the Trump administration is willing to destroy the FOMC’s independence and inflation-fighting credibility, which may result in higher long-term interest rates,” Capital Economics warned.
For his part, Hassett seemed to display a rare hint of independence from Trump last week, saying the president’s opinion would have “no weight” on the rate-setting Federal Open Market Committee.
Not everyone is so bullish on the economy. Analysts at Citi Research expect GDP growth of around 2% next year with inflation heading toward the Fed’s 2% target and the labor market continuing to soften.
That will clear the war for the Fed to cut rates by a total of 75 basis points—triple what Capital Economics sees—to 2.75%-3.0%.
“Risks are balanced toward a more rapid rise in the unemployment rate that could lead the Fed to cut rates more rapidly and deeply,” Citi said in a note Thursday. “We do not expect a rebound in growth or labor demand in 2026. Instead, our base case is for hiring to remain subdued leading to slower income growth and a sustained slowdown in consumer spending.”