ISTANBUL 

As the US labor market weakened significantly in recent months and inflation came in below expectations, experts predict that the US Federal Reserve Fed will continue to cut interest rates in 2026, after slashing the policy rate two times this year.

The disruption in public sector data resulting from the US government shutdown is reducing predictability regarding the Fed's policies.

With US inflation fell below expectations in September, expectations that the Fed may cut interest rates at its meeting next week have gained strength.

The annual inflation edged up to 3% in September, from 2.9% in August, coming below the market expectations of 3.1%.

Before the government shutdown created a blackout for data releases, datasets indicated that the labor market in the US was slowing down.

US non-farm payrolls increased by only 22,000 jobs in August, below expectations, while the unemployment rate rose from 4.2% to 4.3%. The private sector employment, meanwhile, fell by 32,000 jobs in September, contrary to expectations for an increase.

Rabobank Senior US Strategist Philip Marey told Anadolu that the lower-than-expected inflation data supports a 25 basis point interest rate cut at the Fed's October meeting.

Marey said data indicated continued weakness in the labor market, and that the Fed is likely to announce the end of the Federal Open Market Committee's (FOMC) balance sheet reduction process.

He added that Fed Chair Jerome Powell may not provide much verbal guidance for December due to limited data releases.

Marey said he expects another 25 basis point rate cut in December given the downside risks stemming from the ongoing labor market weakness and the government shutdown.

"Only if inflation or employment data surprise to the upside, the FOMC may still decide to skip December. Looking ahead to next year, we expect the Fed to continue its cutting cycle at least until their estimate of the neutral rate is reached," he added.

- Markets skeptical of Fed's forecasts, 2 further rate cuts expected in 2026

ING Chief International Economist James Knightley also emphasized that the Fed is expected to cut interest rates by 25 basis points at its October meeting.

Knightley said the Fed resumed cutting interest rates at its September meeting after a nine-month hiatus, and that Powell characterized this as a "risk management" move.

"Above-target inflation is a problem, and tariffs continue to pose a threat, but it’s fair to say tariff-induced price hikes are not coming through as aggressively as feared," he said.

Knightley noted that business surveys do not paint a particularly optimistic picture of the economy, predicting that the Fed will cut interest rates at its October meeting and then by 25 basis points in December.

"At the September FOMC meeting, the Fed updated its own forecasts with the median expectation of officials suggesting that these two cuts plus one more in 2026 would be enough to support growth while containing inflation," he said.

Noting that the markets are skeptical, believing that a rapidly cooling jobs market will require more aggressive action, Knightley said two further rate cuts are expected next year.