The Federal Reserve's rate-cutting cycle is stalling. Economists at RSM now project only two cuts in 2026, arriving later in the year as the One Big Beautiful Bill Act of 2025 threatens to reignite inflation with $100 billion in fiscal stimulus.
"Whenever you have that kind of money being injected into the economy, you're going to see higher GDP growth, but at the same time higher inflation," said Joe Nguyen, RSM economist. "For the short run, we think that especially for January and March, the bar for another rate cut is much higher than it was in 2025."
The policy shift comes as Fed Chair Jerome Powell's term approaches its May 2026 expiration. Banks and corporate borrowers face an extended period of elevated funding costs, with the fed funds rate likely staying above 4% through mid-year despite recession probabilities moderating to 30%.
Corporate lending conditions remain tight as banks balance credit quality against mounting economic uncertainty. Danish lender Danske Bank reported solid 2025 results but flagged divergent consumer patterns, with lower-income households bearing disproportionate pressure from policy headwinds.
"McDonald's losing low-income customers is a reflection of that," noted Marisa DiNatale, economist at Moody's Analytics. "A lot of the economic and policy headwinds are disproportionately affecting lower-income households."
The banking sector confronts a split lending environment: wealthier customers maintain spending capacity while lower-income segments retreat. This bifurcation complicates credit risk assessment as institutions prepare for potential leadership changes at the Federal Reserve.
International markets anticipate stabilization despite U.S. policy flux. "Both in Denmark and in our closest export markets, we see prospects for increased demand in 2026, alongside stabilised inflation and interest rates," said Las Olsen of Danske Bank. European institutions are positioning for opportunities as American monetary policy enters a holding pattern.
The Fed's constrained rate path creates headwinds for commercial real estate refinancing and corporate debt rollover through 2026. Banks holding significant CRE exposure face prolonged margin pressure as borrowing costs remain elevated absent near-term Fed action.