Federal Reserve Interest Rates 2026: What Inflation Prediction Markets Are Really Pricing In

2026 is where the “high rates” story stops being a debate about the last inflation print—and turns into a referendum on the entire post‑pandemic regime.

Right now, the Fed’s policy stance is still restrictive by most estimates: the effective fed funds rate is about 3.64% in early January 2026, with the target range at 3.50%–3.75%. The next two years matter because this is the window in which the Fed itself expects the economy to look “normal” again—yet not perfectly aligned with its mandates. In the December 2025 Summary of Economic Projections (SEP), the median path implies:

• Inflation: PCE running near—but slightly above—2% into 2026 (roughly ~2.0%–2.1% by end‑2026).
• Unemployment: drifting to ~4.1%–4.3%, around the Fed’s longer‑run estimate.
• Policy rate: easing toward neutral, with the end‑2026 fed funds projection around ~3.2%–3.4%.

That combination—near‑target inflation, a labor market at “long‑run,” and a funds rate converging toward neutral—is exactly why 2026 is pivotal for macro traders. If the economy truly reverts to that baseline, the trade is about term premium, carry, and the slope of the curve. If it doesn’t, 2026 becomes the year the Fed is forced to choose between (a) tolerating a persistent inflation overshoot or (b) re‑tightening into a softer labor market.

Prediction markets make that choice tradable today. Long before the SEP gets revised, markets already list contracts on 2026 fed funds levels, inflation outcomes, and recession odds—and they update in real time as payrolls, CPI/PCE, oil, and policy headlines hit. For macro investors, that’s not just a sentiment gauge; it’s a live map of consensus and tail risks.

This piece will connect those market‑implied probabilities to the Fed’s own guidance (SEP, minutes, and balance‑sheet stance) and to historical base rates: after major hiking cycles, how quickly does the Fed usually cut, how far, and under what inflation/unemployment conditions? The goal is to isolate where 2026 pricing looks efficient—and where it may be systematically mispriced.

The Fed’s Starting Point Heading Into 2026

Before you can interpret what inflation and rate prediction markets are pricing in for 2026, you need a clean baseline for what the Fed is actually doing now—and what the Fed itself says the economy should look like by the end of 2026 under “appropriate” policy.

1) Policy rate: already off the highs, but not “easy”

The key reality of early January 2026 is that the hiking cycle is long over—and the cutting cycle is already well underway. After multiple cuts across 2025 from post‑COVID highs, the Fed enters 2026 with a 3.50%–3.75% target range, and the effective fed funds rate (EFFR) around 3.64%.

In other words, monetary policy has moved from “restrictive by design” to something closer to a late‑cycle calibration problem: how much restriction is still necessary to finish the inflation job without pushing the labor market too far.

This is where the Fed’s own language matters. Chair Powell and several colleagues have increasingly framed the stance as within a broad range of neutral estimates—but still “mildly restrictive” given the cumulative inflation overshoot of the past few years. That nuance is important for 2026 pricing: if policymakers believe they’re only slightly above neutral, the bar for aggressive 2026 cuts is higher unless unemployment rises meaningfully or inflation breaks sharply lower.

2) Balance sheet: QT ended; “plumbing” now dominates

The second anchor for 2026 is that the balance sheet is no longer being used as a tightening lever.

From 2022 through the QT period, the Fed operated with the familiar runoff framework: up to $60B/month of Treasury runoff and up to $35B/month of agency MBS runoff (a combined maximum of $95B/month when maturities and prepayments were sufficient). That “cap” structure matters because it conditioned term‑premium narratives for most of the post‑2022 tightening regime.

But heading into 2026, the Fed has ended active quantitative tightening and shifted balance‑sheet operations toward reserve‑management purchases and reinvestments designed to keep the system comfortably in the “ample reserves” zone. The Fed’s emphasis here is not “stimulus” in the QE sense; it’s risk control—avoiding an accidental tightening via reserve scarcity and money‑market stress.

For macro traders, the implication is straightforward: the Fed wants the policy rate (not ongoing runoff) to be the primary macro tool in 2026. That tends to reduce the probability of a surprise tightening impulse from the balance sheet side—and makes 2026 rate expectations more sensitive to the labor/inflation data flow.

3) The Fed’s own 2026 macro baseline (December 2025 SEP)

The Fed’s official “center of gravity” for 2026 comes from the December 2025 Summary of Economic Projections (SEP). The median participant path for end‑2026 is essentially a soft‑landing template:

• Fed funds (end‑2026): low‑3% area (~3.2%–3.4%)
• PCE inflation (Q4/Q4 2026): ~2.0%–2.1%
• Unemployment (Q4 2026): ~4.1%–4.3%
• Real GDP growth (Q4/Q4 2026): ~1.7%–1.9%

Read that combination as the Fed’s “normalization” story: inflation basically back at target, the labor market drifting near longer‑run, and growth running near potential—while rates glide toward neutral rather than collapsing.

This SEP baseline is the reference point for every prediction market contract you’ll look at later in this article. If markets are pricing a 2026 funds rate well below the low‑3s, they’re implicitly rejecting some part of the SEP narrative (usually via weaker growth and higher unemployment). If markets are pricing inflation materially above ~2.1% into late 2026, they’re implicitly betting the Fed either can’t—or won’t—keep policy mildly restrictive long enough to finish the job.

4) Why this starting point matters for 2026 market interpretation

Put the pieces together and the Fed enters 2026 with:

1. A policy rate that is no longer punitive, but not yet consistent with a “victory lap” on inflation.
2. A balance sheet regime that is designed to avoid tightening accidents, not to keep draining liquidity.
3. An official forecast that assumes macro normalization without a recession.

Prediction markets will deviate from that baseline—sometimes for good reasons, sometimes because participants over‑react to near‑term prints. The rest of this deep dive will treat the early‑2026 stance above as the anchor, then map where market‑implied probabilities are aligned with (or meaningfully diverge from) the Fed’s own central case.

What the 2026 contracts actually trade

On SimpleFunctions (and on other prediction venues that list macro outcomes), 2026 isn’t a “vibes” year—it’s a set of discrete, settle‑able contracts.

The most useful ones for macro positioning fall into four buckets:

1. End‑2026 fed funds target range (usually in 25–50 bp buckets). These contracts translate the entire 2026 cutting cycle into a single, tradable payoff.

2. 2026 inflation bands (CPI and/or PCE, typically Q4/Q4 or calendar‑year averages). These are a clean way to express whether the U.S. ends 2026 closer to target—or stuck in a “high‑2s / low‑3s” regime.

3. 2026 unemployment bands (often the unemployment rate at a specific month/quarter). These contracts are the labor‑market leg of the Fed’s dual mandate.

4. U.S. recession: Yes/No in 2026 (often defined via NBER dating or a platform‑specific definition). This is the tail‑risk hedge that tends to “wake up” when labor softens or financial conditions tighten.

The key advantage versus a pure forecast poll is that prediction markets aggregate real money into a probability distribution. And that distribution can diverge meaningfully from both:

• the Fed’s own central case (the December 2025 SEP), and
• conventional “consensus” forecasts, which often compress uncertainty into a single point estimate.

The Fed’s baseline we anchored on is a soft landing: PCE ~2.0%–2.1%, unemployment ~4.1%–4.3%, and the funds rate easing toward ~3.2%–3.4% by end‑2026. Prediction markets let you ask—today—whether traders are paying up for outcomes that the SEP treats as low‑probability.

Below is a SimpleFunctions snapshot (early January 2026). Treat it as a probability map—not a forecast—and focus on where odds cluster (the “center of gravity”) and where open interest persists in tails.

1) Rates: markets lean “low‑3s,” but keep meaningful downside tails

The modal outcome in the end‑2026 funds rate market sits in the 3.00%–3.50% bucket. That’s directionally consistent with the SEP’s low‑3% endpoint—but the shape matters.

• Center of gravity: The market’s highest‑probability bucket (3.00%–3.50%) is basically the “gradual normalization” regime.
• Downside tail: Non‑trivial probability sits below 3.00%, which is the market’s way of saying: if unemployment rises faster than the Fed expects, the cutting cycle does not stop neatly at neutral.
• Upside tail: There’s still a bid for >3.50% outcomes—reflecting the scenario where inflation progress stalls and the Fed pauses well above its longer‑run estimate.

This is where prediction markets can differ from the dot plot in a tradable way. The SEP median is a single path; the market is a distribution. Even if both “agree” on ~3.3%, the market can be simultaneously pricing (a) a non‑recessionary glide path and (b) a meaningful probability of a sharper easing cycle.

One way to sanity‑check the rate distribution is to compare it with other market pricing. For example, 10‑year breakeven inflation is around 2.27% (Jan 8, 2026, FRED)—consistent with long‑run inflation expectations being anchored near target, but not screaming “deflation.” That backdrop naturally supports a base case of modest additional easing rather than an emergency sprint to zero.

An external, non‑prediction‑market view that aligns with the market’s modal bucket comes from BlackRock’s iShares team, which argues the most likely 2026 path is for the Fed to bring rates down “closer to 3% over the course of 2026.”

2) Inflation: markets cluster in the mid‑2s, but won’t rule out “stuck above 3%”

The inflation board is where prediction markets often diverge most from the SEP.

The Fed’s December SEP centers on something close to “mission accomplished” by end‑2026 (PCE near ~2.0%–2.1%). Markets, however, tend to price more persistence—less because participants are calling for 1970s‑style inflation, and more because they don’t fully buy a frictionless return to target in a world of:

• tariff and supply‑chain aftershocks,
• shelter and services persistence,
• and a Fed that is already closer to neutral than “deeply restrictive.”

In the SimpleFunctions inflation bands, the 2.0%–2.5% and 2.5%–3.0% buckets dominate—i.e., a mid‑2s regime is treated as the most likely landing zone.

The real signal is the right tail: there is still meaningful probability on 3.0%–3.5% and >3.5% outcomes. Translating that into the practical question macro investors care about:

• markets are not “forecasting” sticky 3%+ inflation,
• but they are charging you for the risk that inflation is still above 3% late in 2026.

That is exactly where the SEP vs market wedge becomes a tradeable disagreement. If you believe the Fed’s baseline is too optimistic on disinflation, inflation‑tail contracts can be cleaner expressions than trying to time month‑to‑month CPI prints.

Notably, large asset managers have floated a similar persistence narrative. J.P. Morgan Asset Management, for example, has argued for a tariff‑related hump that fades only gradually—consistent with a world where inflation ends 2026 above 2% even without a growth boom.

3) Recession and unemployment: a “soft landing” plurality with a thick left tail

On recession, markets generally do not price 2026 as the base case downturn year. The “No recession” outcome leads.

But the notable feature is that recession probability is still material—and it shows up even more clearly when you look at unemployment bands. The modal unemployment bucket sits around the low‑to‑mid 4s, which is compatible with a soft landing. Yet the probability mass above 5% is the market’s hedge against the nonlinear dynamic the Fed worries about most: once labor deterioration accelerates, it tends to move faster than forecast models imply.

This matters because the rate market’s downside tail (<3.0%) and the unemployment tail (>5%) are essentially the same story told two different ways:

• If labor weakens sharply, cuts don’t stop at “neutral,” and recession odds rise.
• If inflation stays sticky, cuts pause higher, and recession odds can rise for a different reason (policy restraint maintained into slowing growth).

Prediction markets are useful precisely because they show you both tails at once—rather than forcing you into a single narrative.

Base Rates: How The Fed Has Cut After Inflation Peaks Since 1980

Prediction markets give you a distribution for where policy might land in 2026. History gives you the prior for what that distribution usually looks like once inflation has clearly peaked.

Two framing choices matter:

1. Define “peak inflation” in a way the Fed reacts to. In real time, the Fed tends to respond to a mix of realized inflation, inflation expectations, and labor-market slack. But as a historical yardstick, “inflation has peaked” is usually visible first in headline CPI (oil/commodities) and confirmed later in core PCE/core inflation.

2. Measure the cutting cycle from the peak policy rate. For 2026 scenario work, the practical question isn’t “will the Fed cut?”—it’s how far the Fed typically unwinds once it’s confident the inflation trend is down.

Across the major post-1980 cycles, a consistent pattern emerges:

• After inflation clearly peaks, the Fed typically transitions from hikes to cuts within ~12–24 months.
• In “standard” late-cycle episodes, the peak-to-trough decline in the funds rate is often 300–600 bps over ~2–3 years.
• Big, fast easings—500–1000+ bps—usually require a deep recession, a financial accident, or both, and they come with large labor-market deterioration.
• When inflation is already low/contained (or the Fed is cutting “insurance”), the easing is usually modest: ~75–150 bps over multiple years, often with no recession.

Cycle-by-cycle: what “normal” looks like (and what it doesn’t)

1) Volcker disinflation (early 1980s): the “extreme” template

The early-1980s regime is the clean example of credible disinflation through pain. Headline CPI peaked around ~14% in 1980, and the funds rate reached the high teens (~19–20%) before the Fed ultimately pivoted hard.

• Cut magnitude: roughly 1000 bps+ from peak to the single digits over ~2–3 years.
• Macro cost: back-to-back recessions (1980 and 1981–82) and unemployment near ~11%.

This is the key base-rate warning for 2026 traders: very large cuts are historically linked to very large labor-market pain. If a 2026 contract is pricing a “Volcker-scale” easing path, it is implicitly pricing a recessionary or crisis environment, not a gentle glide to neutral.

2) Early-1990s: “standard late-cycle” easing with a recession

In the late 1980s the Fed tightened into an inflation/overheating concern, taking the funds rate to roughly ~9–10% before cuts began as growth rolled over.

• Timing: last hikes in 1989; the pivot to cuts followed within roughly a year.
• Cut magnitude: about ~600 bps over ~2½–3 years, taking policy down toward ~3% by the early 1990s.
• Labor market: unemployment rose from roughly ~5% to ~7.5%.

This cycle sits near the “middle” of the historical distribution: cuts are meaningful, but not “to zero,” and they are tied to an ordinary recession and a ~2pp unemployment increase.

3) 1994–95 (plus 1998 “insurance” cuts): preemptive hikes, modest cuts

The 1994–95 tightening cycle is the counterexample that matters most for soft-landing narratives. The Fed raised rates from roughly 3% to ~6% with inflation relatively contained.

• No major recession followed the peak.
• The eventual easing (notably the 1998 LTCM/Asia “insurance” response) totaled roughly ~125 bps over several years.

If you’re trying to map prediction-market “mild easing” odds into a historical bin, this is the closest analogue: inflation not spiraling, credibility intact, and cuts used to manage risk—not to rescue the economy.

4) 2004–06 to GFC: standard inflation backdrop, extreme financial outcome

In 2004–06 the Fed hiked steadily from ~1% to 5.25%. Inflation wasn’t a 1970s-style problem; the crisis came from credit and housing.

• Timing: a long hold after the last hike (2006), then aggressive cuts starting in 2007.
• Cut magnitude: roughly ~525 bps to near zero by end-2008.
• Macro cost: the 2007–09 recession and unemployment rising toward ~10%.

This is the second major historical template for “big cuts”: you can get a 500+ bp easing cycle even without extreme inflation—but only if the economy experiences a deep recession/financial shock.

5) 2015–18 and 2019: low-inflation regime, insurance cuts

The post-GFC hiking cycle peaked at 2.25–2.50% in 2018. Inflation (core PCE) was near but often below target. The Fed delivered three cuts in 2019 (75 bps total)—classic “insurance” easing into slowing global growth and trade uncertainty.

• Cut magnitude (non-crisis): ~75 bps.
• No recession in 2019; unemployment stayed low.

COVID is a separate, exogenous shock that drove a return to zero—useful as a reminder that tails exist, but not a clean analogue for an endogenous 2026 cycle.

What these base rates imply for 2026 pricing

For macro investors using prediction markets, history is less about finding a perfect analogue and more about classifying the size of cuts the market is paying for:

• Modest easing (≈75–150 bps) maps to “insurance/soft landing” regimes (1995/1998, 2019).
• Standard easing (≈300–600 bps) maps to “late-cycle + recession” regimes (early 1990s; parts of 2001-style cycles as well).
• Extreme easing (≈500–1000+ bps) maps to deep recessions or financial accidents (early 1980s; GFC).

That backdrop is what lets you judge whether 2026 rate odds are aggressive or conservative. If end-2026 contracts imply only a small move from today’s level toward a low-3% handle, that’s historically consistent with an “insurance” regime. If they imply a much larger drop, history suggests you should pair that view with higher unemployment/recession probabilities, because that’s how large cutting cycles typically arrive.

One reason this matters right now is that mainstream institutional commentary often frames 2026 as a normalization year. BlackRock’s iShares team, for example, argues “the most likely path” is for the Fed to bring rates down “closer to 3% over the course of 2026.” That’s a statement that implicitly sits in the modest-easing part of the historical distribution—not the “big cuts” buckets.

In the next sections, we’ll use these historical cut-size bins to translate market-implied 2026 outcomes into macro stories—soft landing, recessionary reversion, or inflation persistence.

2026 Macro Consensus: Fed, CBO, Banks, And IFIs vs Market Pricing

Historical base rates tell you what usually happens after an inflation peak. Institutional forecasts tell you what the “official” and “sell‑side” center cases think should happen now. And prediction markets tell you what traders are willing to pay for across both the center and the tails.

The useful exercise for 2026 is to stack these three layers on top of each other and ask a simple question: where are markets accepting the soft‑landing baseline, and where are they paying up for regime risk?

1) The Fed SEP: a soft landing with near‑target inflation

Start with the anchor that most other forecasts reference—directly or indirectly. The December 2025 SEP is effectively a “normalization” story for 2026:

• Inflation: PCE around ~2.0%–2.1% by end‑2026.
• Policy rate: fed funds in the low‑3s (~3.2%–3.4%).
• Unemployment: just over 4% (~4.1%–4.3%).
• Growth: ~1.7%–1.9% (near potential).

The important part isn’t that the SEP is optimistic—it’s that it’s internally consistent: near‑target inflation, unemployment drifting toward its longer‑run level, and rates gliding toward neutral. In that world, 2026 is not a “crisis cuts” year; it’s a “finish the job without breaking the labor market” year.

2) The CBO: similar destination, softer labor market on the way

The CBO’s medium‑term baseline typically reads more like an economy that cools enough to relieve inflation pressure—but not enough to create a deep recession. The standout difference versus the SEP is the labor market profile.

CBO’s latest framing has unemployment peaking around 4.6% in 2026, with inflation still modestly above 2% and policy rates still in the mid‑3s before easing further later in the decade. The macro story is “softer than the SEP,” but it’s still not a hard‑landing call.

That matters for prediction markets because it implies a different mix of risks:

• If CBO is closer to right on unemployment, then the downside tail in rates (more cuts than the SEP implies) is easier to justify.
• If the SEP is closer to right on inflation, then the right tail in inflation should be priced as insurance rather than base case.

3) Banks and asset managers: inflation persistence, gradual easing

The large‑institution “street consensus” for 2026 tends to cluster around:

• CPI in the high‑2s,
• PCE in the mid‑2s,
• funds rate drifting toward ~3% by end‑2026,
• and ~75–125 bps of additional cuts from early‑2026 levels—enough to de‑restrict policy, not enough to declare victory.

What’s different versus the SEP is not the direction of travel (lower inflation and lower rates). It’s the pace and the residual: banks are more willing to embed a world where inflation ends 2026 above target even without a growth boom.

J.P. Morgan Asset Management is a clean example of this “persistence” camp, explicitly forecasting tariff‑linked stickiness that fades only gradually. In their baseline, inflation comes down through 2026, but not all the way back to 2%.

BlackRock’s iShares team lands closer to the Fed on rates: the modal 2026 path is rates “closer to 3%,” but with clear data dependence. The market implication is that many real‑money investors are comfortable owning duration if they believe the Fed can keep inflation expectations anchored while easing slowly.

4) IFIs and ratings agencies: slightly above target inflation, gentle easing

IMF/OECD‑style baselines (and ratings‑agency macro updates) generally avoid dramatic calls. Their 2026 clustering looks like:

• Inflation slightly above target (often upper‑2s on CPI; mid‑2s on PCE),
• unemployment around 4.3%–4.8%,
• and policy easing only gently.

Fitch’s early‑2026 commentary highlights a key risk the SEP treats as transitory but markets keep pricing as a tail: delayed tariff pass‑through that can push inflation higher in 2026 even as growth cools.

5) Academics and SPF‑style surveys: a post‑2021 humility premium

The post‑pandemic forecasting lesson has been costly: professional forecasters broadly under‑estimated inflation persistence. As a result, SPF‑style and academic forecasts have migrated toward building in more persistence—especially in services inflation and policy‑sensitive shelter components.

The practical takeaway is that 2026 “consensus” has shifted upward versus earlier vintages: fewer forecasters assume a clean glide to 2.0% inflation by end‑2026, and more embed a mid‑2s floor unless growth slows meaningfully.

6) Where prediction markets differ from the institutional center

Overlay these point forecasts on the distribution implied by prediction markets, and you get a clear map of disagreements:

A) Rates: markets broadly accept low‑3s, but pay for bigger cuts Institutional forecasts cluster around ~3%–mid‑3s for end‑2026, which is consistent with the modal prediction‑market bucket we typically see (low‑3s). The key divergence is that markets maintain meaningful probability mass below the institutional range—i.e., scenarios where unemployment rises fast enough that the Fed cuts past neutral.

B) Inflation: markets are less confident than the SEP The SEP’s “near‑2%” endpoint sits on the optimistic edge of many private forecasts. Prediction markets reflect that by concentrating in mid‑2s inflation outcomes and keeping a live right tail for 3%+ regimes. In other words: the SEP is a clean soft landing; markets price a soft landing plus persistence risk.

C) Unemployment and recession: soft landing plurality, thicker left tail than point forecasts CBO’s 4.6% peak unemployment view is closer to what markets implicitly hedge than the SEP’s “just over 4%” baseline. Even when “no recession” is the plurality outcome, prediction markets continue to price a non‑trivial recession probability because labor market dynamics are nonlinear: once unemployment rises, it can rise faster than models assume.

7) A simple way to read the whole stack

For 2026, the institutional landscape is less about “who’s right” and more about identifying which variable is doing the heavy lifting:

• SEP: disinflation does most of the work (inflation converges to target; unemployment stays near long‑run).
• CBO/IFIs: labor cooling does more of the work (unemployment rises more; inflation comes down more slowly).
• Banks/SPF/academics: persistence risk stays in the system (inflation ends 2026 above target unless growth weakens).
• Prediction markets: the center looks like a blend of all three, but the tails stay tradable—especially the joint outcomes of (higher unemployment + more cuts) and (higher inflation + fewer cuts).

That’s exactly what you want as a macro investor: not a single “consensus” number, but a transparent set of disagreements you can express in discrete contracts.

Dual Mandate, QT Endgame, And What Really Drives The 2026 Reaction Function

By early 2026, the Fed’s policy problem is no longer “how fast can we get inflation down from 6%?” It’s a tighter—and more tradable—question: how does the Committee calibrate policy when inflation is still above 2% but the labor market is no longer bulletproof?

That’s the regime prediction markets are implicitly modeling when they assign probability mass to both (a) “rates drift to the low‑3s and stop” and (b) “rates keep falling because the labor market cracks.” The dividing line between those outcomes is the Fed’s reaction function—and in 2025–26 it’s being shaped by two forces:

1. Dual mandate tradeoffs are becoming real again. Inflation is cooling, but not yet “safely done,” while downside employment risks are rising.
2. The balance sheet is being reframed as plumbing. QT ends, reserve management begins, and the Fed tries to make the policy rate carry the macro stance.

1) 2025–26 is the Fed’s “tightrope” period: disinflation vs a cooling labor market

FOMC communications in late 2025 repeatedly emphasize being “attentive to the risks to both sides of the dual mandate.” That phrasing matters because it tells you the Fed is no longer operating in the 2022–23 world where inflation risk dominated everything.

A useful way to think about the setup is:

• Inflation: The Fed expects progress, but it’s managing the risk that inflation gets “stuck” above target (especially in services and any tariff‑pass‑through window the staff sees).
• Employment: The labor market is cooling. The Fed is increasingly focused on the possibility that a gradual slowdown turns nonlinear—where unemployment rises faster than forecast models imply.

In practice, that translates into a risk‑management framework rather than a mechanical Taylor‑rule response. Minutes from the December 2025 meeting describe a Committee that is making policy based on confidence in the disinflation trend and insurance against an unnecessary labor market deterioration—not just the last CPI/PCE print.

What’s changed from 2023–24: after multiple years of inflation overshoots, many participants appear to implicitly overweight inflation risk (and inflation expectations risk) relative to a symmetric “2% miss is as bad as a 2% undershoot” framework. But the labor side is regaining influence as cooling becomes visible.

For traders, the important implication is that the 2026 reaction function likely has two triggers that matter more than “growth is 1.8% instead of 2.0%”:

• Trigger A (inflation confidence): Does the Committee believe inflation is converging to 2% on a durable basis? If yes, it keeps cutting toward neutral. If no, it pauses higher.
• Trigger B (labor deterioration): Is unemployment rising in a way that threatens maximum employment? If yes—especially alongside falling inflation—the Fed cuts faster and further.

That’s why prediction markets on 2026 unemployment bands often explain the shape of the 2026 rate distribution better than any single inflation contract: once labor weakness becomes the dominant risk, cuts don’t stop neatly at “neutral.”

2) QT ends—and the Fed tries to make the balance sheet boring again

The second big input into the 2026 reaction function is that the Fed wants to remove balance‑sheet runoff as an active tightening channel.

From 2022 onward, QT was executed via monthly runoff caps—up to $60B/month in Treasuries and $35B/month in agency MBS—a structure designed to tighten financial conditions gradually without selling assets outright. But by late 2025, the Fed halted balance‑sheet runoff and pivoted toward reserve‑management purchases (including bill buying) intended to keep reserves “ample.”

This is a subtle but crucial distinction:

• Ending QT is not the same as restarting QE.
• The Fed’s stated goal is to avoid a repeat of 2019‑style reserve scarcity and money‑market stress. That’s plumbing.
• QE‑style stimulus is about changing the stance by compressing term premium and easing broader financial conditions.

In 2026 communications, the Fed is likely to keep repeating the same message: the policy rate is the stance; the balance sheet is implementation. That matters because it changes what traders should treat as the “first‑order” signal.

First‑order lever: expected path of the funds rate (cuts, pauses, re‑tightening risk).

Second‑order—but still tradable—levers:

• term premium (how much extra compensation investors demand for holding long duration), and
• funding stress (repo, SOFR dynamics, bill scarcity).

Even if the Fed doesn’t want the balance sheet to be an active macro lever, the market can still reprice term premium when QT ends (less net duration supply to the public) or when reserve conditions tighten (higher money‑market rates). Those moves feed back into financial conditions and can change the rate path indirectly.

3) What the QT endgame does (and doesn’t) change for 2026 pricing

The clean mental model for 2026 is:

• If the funds rate is near neutral and inflation is still above 2%, the Fed’s bias is to cut slowly and preserve credibility.
• If unemployment breaks higher quickly, the Fed will prioritize preventing labor market damage—provided inflation is still trending down and expectations are stable.
• If inflation re‑accelerates or expectations drift up, the Fed will pause cuts (or even tighten) even if growth is slowing.

Where the QT endgame matters is not that it “adds stimulus” by itself—it’s that it reduces the probability of an accidental tightening impulse coming from reserve scarcity.

So the right way to translate QT’s end into prediction‑market interpretation is:

• In a world where the balance sheet is stabilized for reserve management, rate contracts should carry most of the information about the Fed’s macro stance.
• But if prediction markets are pricing a meaningful probability of net asset purchases (QE‑like) by 2027, that’s a tell: traders are embedding additional easing beyond the policy‑rate path—usually because they expect recession, funding stress, or a term‑premium shock severe enough that the Fed abandons the “plumbing only” framing.

That’s why QT/QE scenario markets can be disproportionately informative even when they settle after 2026: they reveal whether the market thinks the Fed’s “rate‑only stance” goal is credible.

4) The practical “reaction function checklist” for 2026 traders

When you map prediction‑market odds into a macro trade, you typically want to track three questions (and the contracts that correspond to them):

1. Is inflation convergence believable? (inflation bands, long‑run expectations proxies)
2. Is labor weakening gradual or nonlinear? (unemployment bands, recession contracts)
3. Is liquidity plumbing staying boring? (QE‑by‑2027/QT‑restart style contracts; funding‑stress proxies)

If you see unemployment tail risk rising without a corresponding rise in QE probability, that’s a market telling you the Fed can likely manage the cycle primarily with rates. If QE odds rise alongside recession odds, the market is telling you that balance sheet policy could re‑enter the stance conversation, even if the Fed resists that characterization.

In short: 2026 is a dual‑mandate year first and a balance‑sheet year second—but the balance sheet still matters as a tail‑risk accelerant.

Global Central Banks In 2026: How ECB, BoE, BoJ, And PBoC Shape The Fed’s Room To Maneuver

The Fed’s 2026 reaction function is domestic in mandate—but global in transmission.

Once you’re in the “late disinflation / mildly restrictive” phase, small changes in global rate differentials and foreign term premia can do a surprising amount of the Fed’s tightening or easing for it. That matters because 2026 markets aren’t just pricing “what the Fed wants”; they’re pricing the financial conditions the Fed will actually face.

A practical way to think about it is: by 2026 the Fed is steering with a short-rate wheel (fed funds), but the car’s traction depends on three global inputs:

1. FX pass-through: global easing/tightening changes the dollar, which changes U.S. inflation via import prices.
2. Cross-border duration demand: shifts in JGB/Euro sovereign yields change foreign appetite for Treasuries, moving U.S. long rates and the term premium.
3. Global demand and commodities: China’s policy stance, and Europe’s cyclical health, affect commodity prices and global trade volumes—feeding into U.S. growth and disinflation.

ECB and BoE in 2026: easing from still-restrictive levels narrows the U.S. premium

The most likely 2026 story in Europe is not a new inflation shock; it’s a slow glide back toward target inflation with policy rates that remain restrictive by 2024 standards.

If the ECB and BoE are easing into 2026 while the Fed is also cutting—but from different starting points—the important macro variable becomes the direction and speed of rate-differential compression:

• Narrowing differentials tend to weaken the dollar versus EUR/GBP.
• A weaker dollar loosens U.S. financial conditions, but also adds inflation impulse through higher import prices and less disinflation via tradables.

This is where prediction markets can under-price second-order interactions. A Fed cut that looks “obvious” in a U.S.-only model can become harder politically and economically if the dollar is already falling and inflation confidence is fragile.

BoJ in 2026: gradual normalization that can still move U.S. long rates

Japan is the outlier: the BoJ is moving from a long era of near-zero/negative rates and yield suppression toward gradual normalization. Even if the path is slow, the market impact can be large because Japan’s yield structure sits at the center of global carry.

What matters for the Fed isn’t “does the BoJ hike 25 bps?” It’s what happens to Japanese long yields and the hedged return Japanese investors can earn abroad:

• Higher JGB yields can raise global term premia, pushing up long-end yields globally.
• They can also reduce Japanese marginal demand for Treasuries (or change hedge ratios), which can tighten U.S. long-rate conditions even if the Fed holds steady.

In other words: BoJ normalization can look like an exogenous tightening shock to U.S. financial conditions—expressed through the 10-year rather than through fed funds.

PBoC in 2026: structurally accommodative, shaping commodities and tradables inflation

China’s 2026 constraint set is different: growth stabilization, property-sector repair, and credit transmission. That typically implies a PBoC that remains structurally accommodative versus the U.S.

For U.S. macro, the PBoC channel is less about direct rate differentials and more about:

• Commodities: China’s demand (and policy support) can move energy/industrial metals, which then show up in U.S. headline inflation and inflation expectations.
• Tradables and supply chains: weak Chinese demand can be disinflationary for goods; stronger Chinese demand can reverse that.
• CNY and export pricing: currency weakness can export goods disinflation, but it can also provoke trade/tariff responses that raise U.S. prices. That feedback loop is hard to model—and often mispriced.

The “constraint set” link: dollar strength vs dollar weakness is not one-directional

Global rate differentials drive the dollar, and the dollar is a two-edged sword for the Fed:

• Strong dollar: tends to damp U.S. inflation (import prices, tradables) but tightens financial conditions (risk assets, earnings, credit) and can slow growth.
• Weak dollar: tends to add inflation impulse and can loosen conditions—potentially reducing the Fed’s room to cut.

This is why it’s useful to keep an eye on long-run inflation expectations proxies alongside FX. For example, the 10-year breakeven inflation rate was ~2.27% on Jan 8, 2026 (FRED)—anchored, but not so low that the Fed can ignore FX-driven inflation pressure if the dollar weakens materially.

Where prediction markets create cross-country arbitrage

If you trade Fed-only contracts in isolation, you’re implicitly assuming global policy is “background noise.” In 2026, it isn’t.

Three common cross-market setups sophisticated traders watch:

1. Fed cuts vs EUR/USD: If markets price aggressive Fed cuts and aggressive ECB cuts, the relative move matters more than the absolute. Mispricing often shows up as inconsistent implied probabilities across the rate path and EUR/USD level.

2. BoJ normalization vs U.S. term premium: If BoJ hike/normalization odds rise while U.S. recession odds are stable, watch for a term-premium repricing that tightens U.S. conditions without any change in Fed contracts—creating a lagging adjustment opportunity.

3. China stimulus vs U.S. inflation tails: If PBoC easing plus fiscal support raises commodity odds, U.S. inflation tail contracts can reprice faster than Fed rate contracts—especially when the Fed is trying to “wait and see.”

The meta-point: prediction markets on ECB/BoE/BoJ paths, FX levels, and global recession odds should be treated as joint distributions with Fed markets—not separate forecasts.

A scenario grid is the only honest way to talk about 2026

By 2026, investors aren’t really trading “the next cut.” They’re trading which macro regime the U.S. ends up in once rates are already near most estimates of neutral.

That’s why a scenario grid beats a single point forecast. The Fed’s December 2025 SEP gives a coherent central path (near‑target inflation, unemployment near long‑run, funds rate in the low‑3s). Prediction markets, in contrast, price a distribution—often with more probability in both tails than the SEP implicitly suggests.

Below are the three scenarios that do most of the explanatory work for 2026. The goal isn’t to be precise to a decimal; it’s to translate market‑implied probabilities plus historical base rates into tradable “boxes” for year‑end 2026 fed funds, late‑2026 inflation, and late‑2026 unemployment.

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Scenario 1: Soft landing (base case) — disinflation continues, labor cools but doesn’t break

Narrative: Inflation keeps drifting lower as shelter/services cool and goods inflation stays contained. Growth slows toward trend but avoids a contraction. The Fed completes the “normalization” glide path: it cuts a bit more, then stops around neutral.

Bands that define the soft landing box:

• End‑2026 fed funds: ~2.75%–3.25% (call it “near 3%”)
• Inflation: PCE ~2.0%–2.5% (CPI typically ~2.3%–2.8%)
• Unemployment: ~4.0%–4.6%

How prediction markets usually map into this box:

• The highest‑probability rate bucket tends to be 3.00%–3.50%, which overlaps this scenario even if the market is less confident than the SEP that inflation cleanly hits 2.0%.
• Inflation contracts often cluster in 2.0%–2.5% and 2.5%–3.0%, implying markets treat “mid‑2s” as at least as likely as “exactly 2%.”

What it implies for trades:

• Curve: modest steepening bias (front end drifts down; long end depends on term premium).
• Rates: the “carry” trade works if recession odds don’t rise.
• Market expression: overweight the low‑3s funds‑rate bucket; pair with 2–3% inflation bands and sub‑5% unemployment.

Why the SEP may be too confident here: SEP is a point‑estimate culture. Prediction markets typically assign the soft landing the largest single probability, but not the overwhelming one the SEP narrative can imply—because markets keep paying for both inflation persistence and labor‑market nonlinearity.

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Scenario 2: Sticky inflation — 3%+ inflation persists without an obvious recession

Narrative: Tariff pass‑through, wage/service persistence, and global shocks (FX/commodities) keep inflation uncomfortably high even as growth slows. This is the hardest regime for the Fed politically and technically: cutting looks risky, but staying tight raises the chance of a later accident.

Fitch explicitly flags this mechanism—“delayed tariff pass‑through” pushing inflation higher in 2026—while other strategists emphasize a longer “cooling” process for services inflation.

Bands that define the sticky inflation box:

• End‑2026 fed funds: ~3.25%–4.00% (cuts slow, or pause in the mid‑3s)
• Inflation: PCE ~2.8%–3.6% (CPI ~3.0%–4.0%)
• Unemployment: ~4.2%–5.0% (cooling, but not recessionary)

Key regime signature: Real yields stay elevated and the Fed resists “victory‑lap” cuts. Long‑term yields can remain high even if the policy rate edges down a bit, because term premium and inflation risk compensation don’t fall.

Where markets can underprice this tail: A common error is extrapolating 2010s‑style disinflation—assuming that once inflation is down from its peak, it must revert to 2% quickly without a growth hit. Sticky inflation is the “unpleasant middle”: no crash, but no clean 2% either.

What it implies for trades:

• Curve: risk of a bear‑steepener (long‑end sells off on inflation/term premium even if the Fed doesn’t hike).
• Rates: fade aggressive‑cut pricing; prefer higher‑for‑longer buckets.
• Market expression: overweight 3.5%+ end‑2026 fed funds buckets paired with 3%+ inflation bands and unemployment staying below ~5%.

A concrete institutional baseline consistent with this box: J.P. Morgan Asset Management projects tariff‑linked persistence, with PCE “drifting down to 2.4% by the fourth quarter of 2026” and CPI closer to the high‑2s—i.e., above target even after progress.

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Scenario 3: Hard landing — growth contracts, unemployment rises sharply, inflation undershoots

Narrative: A demand shock (credit tightening, corporate margin compression, housing relapse, or global slowdown) hits an economy that’s already late‑cycle. Unemployment rises above 5%, inflation undershoots 2% over a 1–2 year horizon, and the Fed cuts faster and deeper than “neutral.”

Bands that define the hard landing box:

• End‑2026 fed funds: ~1.50%–2.75%
• Inflation: PCE ~1.0%–2.0% (CPI ~1.2%–2.2%)
• Unemployment: ~5.2%–7.0%

Why history matters most here: Big cutting cycles are rarely “optional.” Historically, 300–500+ bps of cuts are most consistent with recessionary outcomes (and sometimes a financial accident), not with a gentle glide path.

How to interpret prediction‑market pricing: If recession odds stay moderate while the market puts meaningful weight on sub‑2.5% year‑end funds, that can be a misalignment. The question isn’t “can the Fed cut that much?” It’s “what labor‑market deterioration would force it?”

What it implies for trades:

• Curve: bull steepening (front end collapses).
• Risk assets: higher volatility; credit spreads widen.
• Market expression: buy below‑3% end‑2026 fed funds buckets only if you also like >5% unemployment and/or explicit recession‑in‑2026 contracts.

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Turning contracts into a scenario map (how to actually use this)

A useful trading discipline is to treat each scenario as a joint outcome across three boards:

1. End‑2026 fed funds buckets (the policy reaction)
2. Inflation bands (the constraint)
3. Unemployment / recession odds (the trigger)

If you only trade rates, you’re implicitly assuming the inflation and labor legs line up “nicely.” The scenario grid forces consistency. For example:

• Soft landing requires: inflation in the 2–2.5% neighborhood and unemployment not breaking above ~5%.
• Sticky inflation is the key “mispriced tail” to watch: 3%+ inflation without recession.
• Hard landing requires a labor move: unemployment materially above 5%; otherwise the base rate for deep cuts is weaker.

The actionable edge is usually in the tails: markets can simultaneously underprice high‑inflation/no‑recession outcomes (because they “want” cuts) and overpay for deep‑recession outcomes (because those are intuitive hedges). Your job is to identify which tail is inconsistent with the rest of the board.

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Actionable Angles: Using Prediction Markets To Trade The 2026 Fed Path

The edge in 2026 isn’t “predicting the next CPI print.” It’s identifying when different markets disagree about the same macro regime—and then expressing that disagreement with the instrument that gives you the cleanest payoff.

SimpleFunctions contracts are especially useful because they are digitals on the macro state (end‑2026 funds bucket, 2026 inflation bracket, 2026 unemployment bracket, recession yes/no, QE restart by year‑X). Listed rates and inflation markets, by contrast, are continuous curves (SOFR/OIS, swaps, breakevens) that blend multiple scenarios into a single price. The practical workflow is:

1. translate prediction markets into an implied distribution for the variable,
2. map that distribution to what the curve/breakevens/options are implying,
3. trade the wedge—or hedge the tail—where the disagreement is biggest.

1) Contract-to-instrument map (the “translator”)

A) End‑2026 fed funds target range → front-end rates positioning

• SimpleFunctions: “End‑2026 fed funds range” buckets (e.g., 2.75–3.00, 3.00–3.25, 3.25–3.50, etc.).
• Traditional expressions:
  • SOFR futures (2–8 quarters out, plus longer packs) to express the level of the policy rate.
  • OIS / Fed funds swaps (e.g., 1Y–3Y OIS, 2y2y forwards) to express the expected path.
  • Swaptions on 2Y/5Y tails to express distribution (vol) rather than a point forecast.

How to use the contract: treat it as a market‑priced probability distribution for the terminal level. That’s especially valuable in 2026 because the Fed is already near many estimates of neutral; small changes in unemployment/inflation can swing the terminal level by 50–150 bps.

B) 2026 CPI/PCE inflation brackets → breakevens and inflation swaps

• SimpleFunctions: “2026 CPI” or “2026 PCE” bands (e.g., 2.0–2.5, 2.5–3.0, 3.0–3.5, >3.5).
• Traditional expressions:
  • TIPS breakevens (2y/5y/10y) and breakeven curve trades.
  • Zero‑coupon inflation swaps (1y–5y) to target a calendar‑year or year‑end inflation view more precisely.
  • Inflation caps/floors for convex exposure to tails.

Prediction markets tend to be cleaner for discrete tail outcomes (e.g., “PCE >4% in 2026”), whereas TIPS are often cleaner for medium‑probability, medium‑magnitude moves.

C) 2026 unemployment/recession → risk assets, credit, and rate vol

• SimpleFunctions: unemployment brackets (e.g., >5%, >6%) and recession yes/no.
• Traditional expressions:
  • Equity index hedges (S&P 500 puts / put spreads) and VIX structures.
  • Credit indices (CDX IG/HY), tranche indices, and options for recession convexity.
  • Receiver swaptions / SOFR calls (front-end rally convexity) to express “labor cracks → Fed cuts faster.”

Unemployment is often the missing link between “rates should be lower” and “what forces the Fed to do it.” The prediction-market board makes that link explicit.

D) QE restart by year‑X → term-premium hedges and curve shape

• SimpleFunctions: “QE restarted by 2027 (Yes/No)” or similar.
• Traditional expressions:
  • 5s30s / 2s10s curve trades (QE risk is often a term‑premium narrative).
  • Treasury volatility (long-end vol can rise when the market starts pricing balance-sheet regime shifts).
  • MBS basis / swap spread hedges (QE/MBS reinvestment expectations can affect mortgage spreads).

Even if the Fed frames balance-sheet actions as “plumbing,” a rising QE probability is a tell that the market expects either recession, funding stress, or a term‑premium shock big enough to pull the balance sheet back into the stance conversation.

2) Relative-value setups: trading the wedge between “odds” and “curves”

The most actionable use of prediction markets is basis: when the probability-weighted outcome in SimpleFunctions looks inconsistent with the pricing embedded in SOFR/OIS, breakevens, or credit.

Setup 1: Prediction markets imply lower end‑2026 funds than the SOFR/OIS curve

Signal: the weighted-average implied end‑2026 policy rate from bucket odds is below what the front-end curve implies.

Trade expressions (choose based on what you actually believe):

• Pure rates RV: Receive 2y–3y OIS (or buy a strip of SOFR futures) while selling the “low end‑2026 funds” bucket(s) if you think the prediction market is overpaying for the downside tail.
• Asymmetric macro view: If you think the prediction market is right about deeper cuts but curve pricing hasn’t caught up, you can:
  • go long front-end duration (SOFR strip / TU), and
  • use the prediction-market contract as a cheap digital hedge against “cuts don’t arrive” (e.g., buy a higher end‑2026 bucket to cap losses).

This pairing is a practical way to control path risk: the curve can reprice violently on data; a digital bucket can define the scenario you’re actually underwriting.

Setup 2: Prediction markets imply higher 2026 inflation than breakevens imply

Breakevens are a blend of expected inflation, inflation risk premium, and liquidity. Prediction markets are closer to a raw probability map of outcomes.

If SimpleFunctions prices higher inflation tails (e.g., 3%+ bands) more richly than breakevens appear to justify:

• Hedge the tail cheaply: Buy the high‑inflation band(s) as a hedge while keeping your main inflation exposure in TIPS.
• Cross-market RV (for sophisticated desks): Sell the expensive prediction-market tail (if liquidity allows) while buying inflation convexity where you think it’s underpriced (e.g., inflation caps) or fading breakevens if you think breakevens are rich.

The key is consistency: a “sticky inflation/no recession” regime should show up as (i) fewer cuts priced, (ii) firmer breakevens, and (iii) less equity crash pricing. If only one board is screaming, it’s often the best RV signal.

3) Term-structure angles: ‘first cut of 2026’ vs end‑2026 level

A common mistake is treating “timing” and “terminal level” as the same trade. They aren’t.

• Timing contracts (e.g., “first cut of 2026 by March/June/September”) map best to:

  • SOFR calendar spreads (front contracts vs deferred),
  • 1Y OIS and near-dated swaptions (gamma on meeting-to-meeting repricing).

• End‑2026 level contracts map best to:

  • deferred SOFR packs,
  • 2y2y / 3y1y forwards,
  • intermediate receivers (for “cuts keep going past neutral”).

Historically, after inflation peaks, the Fed often transitions from hikes to cuts within ~12–24 months and then continues easing for 2–3 years in recessionary outcomes. In practical trading terms: it’s entirely plausible for the market to be right on “a cut arrives early” but wrong on “where policy settles.” Prediction markets let you separate those probabilities cleanly.

4) Risk management: prediction markets as tail overlays

Macro hedge funds and corporate/treasury desks often need protection against outcomes that are conceptually simple but operationally messy to hedge in listed markets.

Examples where prediction markets can be unusually efficient:

• Inflation tail hedge: “2026 PCE >4%” (or CPI >4%) is hard to isolate with TIPS alone (breakevens are multi-year averages and include premia). A digital contract can be a targeted overlay against the “tariff pass-through / services persistence” tail.
• Labor-market tail hedge: “Unemployment >6% in 2026” is a direct hedge against the regime that typically forces the Fed to cut faster and credit spreads wider.
• Balance-sheet regime tail: “QE by 2027” is a hedge against the combination of recession/funding stress/term-premium accident—risks that don’t always line up neatly with a single swaption.

Used this way, prediction markets function like event insurance: small premium, large payoff, clearly defined scenario.

5) Sizing and operational realities (don’t skip this)

Prediction markets are powerful, but they come with non-trivial implementation considerations:

• Liquidity & slippage: Bucketed contracts can be thin away from the modal outcome. Size positions assuming you may not be able to exit instantly.
• Settlement definitions: Confirm whether inflation is calendar-year average, Q4/Q4, or a specific print; confirm unemployment month/quarter; confirm recession definition (NBER vs platform definition).
• Model risk in translation: Mapping bucket probabilities into an “implied rate” is sensitive to bucket midpoints and tails. Treat any single-number translation as an approximation.
• Correlation risk: Your hedge only works if the contract and the instrument you’re hedging actually co-move in the scenario you care about (e.g., sticky inflation can hurt both long duration and equities).
• Venue risk: Prediction markets are not identical to cleared futures in margining, regulation, and counterparty structure. Position sizes should reflect that.

Putting it together: a practical “2026 trade builder”

1. Pick the regime you want (soft landing, sticky inflation, hard landing).
2. Use SimpleFunctions to buy/sell the digital statement of that regime (end‑2026 funds bucket + inflation band + unemployment/recession confirmation).
3. Use traditional markets for the scalable exposure (SOFR/OIS, TIPS, swaptions, credit/equity).
4. Use prediction markets again to hedge the tail that breaks your thesis.

That’s how you trade the 2026 Fed path as a distribution—rather than as a headline.

Key 2026 Data And Policy Signals That Will Move Odds

If you’re using prediction markets to trade the 2026 regime, the goal isn’t to watch everything. It’s to watch the handful of releases and policy cues that reliably cause cross-board repricing—when rate buckets, inflation bands, and unemployment/recession odds all move together.

Below are the signals most likely to shift 2026 probabilities quickly, and the “why” behind each.

1) Monthly core inflation: the fastest input into 2026 inflation tails

Core PCE (the Fed’s target metric) and core CPI (the market’s headline driver) are still the highest-frequency catalysts for the inflation board—especially when the print meaningfully diverges from:

• the Fed’s December 2025 SEP baseline (PCE near ~2.0%–2.1% by end-2026), and
• near-term trend measures and Cleveland Fed Inflation Nowcasting updates.

How to read it for markets:

• One hot print rarely reprices 2026 by itself. Two or three consecutive upside surprises—especially in services ex-shelter or broad-based categories—tend to do it.
• Watch the gap between nowcasts and consensus ahead of release day. When nowcasts drift higher into the print, the market often “pre-reprices” the inflation tail (3%+ bands) even before the official number hits.
• The most tradeable pattern in 2026 is inflation persistence without growth collapse—the “sticky inflation” scenario. That regime tends to push up both 3%+ inflation odds and higher end-2026 funds-rate buckets simultaneously.

2) Labor-market deterioration: the trigger for cutting “through neutral”

Rate markets can price gradual easing for a long time. What changes the terminal view—whether the Fed stops in the low-3s or cuts materially below—is usually labor-market evidence that deterioration is becoming nonlinear.

The labor releases that move 2026 odds most:

• Unemployment rate (U-3): markets treat threshold breaks (e.g., moving decisively above the mid-4s) as a regime change because unemployment tends to be sticky on the way up.
• Payroll growth (trend, not one month): three-month averages and diffusion (how broad hiring is across industries) matter more than the latest headline.
• Job openings / vacancies (JOLTS) and quits: they are early-warning indicators for whether cooling is “orderly” or becoming demand-driven weakness.

How to read it for markets:

• If unemployment rises while core inflation is still drifting down, the market typically reprices toward lower end-2026 funds buckets and higher recession odds at the same time.
• If unemployment rises without disinflation, markets tend to split: recession odds rise, but the rate path reprices less (because the Fed is constrained).

3) FOMC meetings + SEP updates: the “official” repricing events

In 2026, the biggest single-day moves in rate odds will often come from FOMC meetings with fresh projections—not because the SEP is “true,” but because it is the Fed’s coordination device.

What matters most inside the meeting package:

• The median and range of 2026 dots: prediction markets don’t just track the median; they react to whether dispersion widens (a sign the Committee is uncertain about the regime).
• Language on r* (neutral rate): if policymakers talk like neutral is higher, the market can reprice toward fewer cuts even if inflation is behaving.
• Balance-sheet implementation vs stance: any hint that reserve-management purchases could become macro-relevant (not just “plumbing”) can change how traders handicap cuts versus QE-style tools.

A practical tell: BlackRock’s iShares team frames the baseline as gradual normalization—“the most likely path” is bringing rates “closer to 3% over the course of 2026.” When the Fed’s SEP or Chair messaging shifts away from that kind of glide-path language, rate buckets can gap quickly.

4) Key Fed speeches: tolerance for above-target inflation (and the credibility question)

Markets reprice most when Fed communication changes the implicit loss function: how much inflation overshoot is tolerated to protect employment.

Speeches that matter disproportionately in 2026:

• Chair and Vice Chair: especially around “confidence,” “well anchored expectations,” and whether policy is “mildly restrictive” or already “at neutral.”
• NY Fed / markets-focused speakers: on funding conditions, the floor system, and reserve scarcity risks.
• Any explicit discussion of a higher r* or a higher longer-run dot.

Also relevant in 2026: governance/leadership uncertainty. BlackRock flags the potential for a new Fed chair after Powell’s term ends in May 2026—a change that can shift probabilities even without new data if markets infer a different reaction function.

5) Global shocks: the fastest path into the “sticky inflation” vs “hard landing” split

Even if your 2026 thesis is U.S.-centric, global shocks can quickly change U.S. inflation and growth tradeoffs, and prediction markets reprice accordingly:

• Tariff changes / trade policy: direct core goods impulse plus second-order FX effects.
• Energy spikes: push headline inflation and can lift inflation expectations, tightening the Fed’s constraint set.
• Major EM stress or China downside surprises: often disinflationary for goods/commodities, but risk-off tightening can raise recession odds.
• Eurozone/UK surprises: can move the dollar and global term premia, changing U.S. financial conditions without a single U.S. data print.

A quick consistency check is long-run inflation expectations pricing. The 10-year breakeven inflation rate was ~2.27% on Jan 8, 2026 (FRED)—anchored, but not so low that the Fed can ignore a renewed inflation impulse.

6) Term premium + funding-market stress: the hidden catalyst for QE-linked odds

One of the most under-monitored drivers of 2026 repricing is money-market plumbing—because it can force the Fed to choose between rate cuts and balance-sheet tools.

Watch:

• Repo and SOFR dynamics (persistent spikes versus IOER);
• Reserve balances and signs the system is drifting out of “ample reserves”;
• Treasury bill supply and Fed bill purchases (reserve-management purchases).

Why it matters for prediction markets: if funding stress rises, markets can start pricing a higher probability of net asset purchases or other balance-sheet expansions—even if inflation is not yet low enough to “justify” aggressive rate cuts. That can swing payouts in QE-linked contracts and change how traders hedge recession tails.

In short: inflation prints move inflation tails; labor moves the terminal rate; FOMC/SEP changes the regime narrative; and funding stress is the wild card that can pull balance-sheet policy back into the stance conversation.

Positioning For The Fed’s 2026 Endgame

By the time you reach 2026, the “rate cuts” trade stops being about whether the Fed is easing and becomes a question of where the easing ends—and what has to happen in inflation and labor markets to force that endpoint.

The Fed’s own baseline remains a gentle normalization. In the December 2025 SEP, the median path implies inflation converging essentially back to target (PCE ~2.0%–2.1% by end‑2026) with the policy rate gliding into the low‑3s (~3.2%–3.4%). That is internally consistent with what policymakers have signaled as they’ve moved the stance from restrictive to “around neutral.” It’s also why the market’s modal “low‑3s” year‑end bucket can look like agreement—until you look at the tails.

History is the reality check. Post‑peak cutting cycles have a bimodal feel: either the Fed cuts a lot because unemployment rises and recession dynamics take over (historically 300–600 bps is common in recessionary cycles), or it cuts less than people expect if inflation remains sticky and the Committee can’t credibly declare victory. There’s very little historical precedent for “deep cuts without material labor deterioration,” and there’s also not much precedent for “inflation re‑accelerates but the Fed keeps cutting anyway.”

That’s exactly where prediction markets matter: they don’t just echo the SEP or sell‑side narrative—they force prices on the uncomfortable joint outcomes (e.g., 3%+ inflation with no recession; or sub‑3% fed funds with unemployment still in the low‑4s). When those joint outcomes get priced inconsistently across rates, inflation, and unemployment boards, that inconsistency is often the trade.

For macro traders, the durable edge in 2026 positioning is a workflow, not a call:

1. Start with base rates, then let data move you. Use historical cut‑size priors to sanity‑check any “terminal rate” story.

2. Treat 2026 as path‑dependent. The end point depends on speed of disinflation and shape of labor weakening. A slow drift in unemployment is compatible with “stop near neutral.” A nonlinear rise is what historically pushes the Fed through neutral.

3. Trade mispriced tails, not consensus. If the SEP‑like outcome is already the modal bucket, the better risk/reward is usually in (a) sticky‑inflation/no‑recession protection, or (b) hard‑landing protection—but only when it’s cheap relative to the rest of the board.

4. Keep balance‑sheet policy as live optionality. QT being “over” doesn’t mean the balance sheet is irrelevant; it means the next balance‑sheet move is more likely to be a regime signal (funding stress, term‑premium shock, recession response). That optionality is often under‑hedged because it’s treated as a footnote.

SimpleFunctions is useful here in two roles: (1) a venue to express discrete scenario views (digital exposure to end‑2026 funds, inflation bands, unemployment/recession triggers), and (2) a dashboard of aggregate expectations that helps you size, hedge, and time risk as 2026 data arrives. The objective isn’t to “predict 2026.” It’s to continuously re‑weight scenarios faster—and more consistently across markets—than the consensus narrative can.