Fed reshuffling is coming, but 2026 still looks divided

While the Fed remains divided on whether to cut interest rates for a third time before its final policy meeting of the year, upcoming changes in the committee’s composition are beginning to shape the direction of policy next year.

Atlanta Fed President Raphael Bostic announced this week that he will retire when his term ends in February, opening up a key seat currently held by interest rate hawks.

If the Atlanta Fed appoints a replacement with a more pessimistic policy view, that could help steer the rate-setting committee toward more rate cuts — even though Atlanta doesn’t have a vote until 2027.

“Non-voting members can still effectively influence the Fed’s policy discussions and decisions,” Evercore ISI analyst Marco Casiraghi said. “We don’t know anything about the next Atlanta Fed Chairman, for now we think Bostic’s decision to retire removes the hawkish voice and makes the FOMC slightly more dovish in outlook.”

Read more: How the Fed’s interest rate decision affects your bank accounts, loans, credit cards, and investments

Bostic’s announcement comes as the Federal Reserve Board of Governors in Washington must approve the reappointment of all 12 regional Fed bank presidents to a new five-year term beginning March 1. This has historically been a routine process, which occurs every five years and ends with a reappointment by a majority of the Fed’s board.

Questions have been raised about whether the Trump administration might try to influence that reappointment process.

An important factor in the composition of the Fed is whether the Supreme Court will rule in January that Fed Governor Lisa Cook — appointed by Biden — can be fired by President Trump. If the Supreme Court rules in Trump’s favor, that would open up another spot at the Fed for the president to appoint a new governor whose views more closely align with his own on lowering interest rates. This person could also influence the confirmation of the heads of the 12 regional federal banks.

But Benson Durham, head of global policy and asset allocation at Piper Sandler, said he did not expect any “drama” or any impact assessment of the “Trump majority” that would shape the rest of the committee.

Durham said he finds it hard to imagine Fed governors saying to regional Fed bank presidents: “So, I know we’ve been working side by side for some time now, but it turns out you’re not MAGA enough, and it’s 2026, so you’re out.”

Perhaps most important, Trump will nominate a replacement for outgoing Fed Chairman Jerome Powell, whose term is set to end in May. The shortlist includes current Fed governors Michel Bowman and Chris Waller — both appointed by Trump during his first term — as well as former Fed Governor Kevin Warsh, National Economic Council Director Kevin Hassett, and BlackRock fixed income head Rick Reeder. Any of these options would likely put the leadership in a more pessimistic position given that these candidates’ political views lean toward lower interest rates.

“The strength of the institution lies in its ability to handle changes in leadership, including the president, governors and Fed chairs, without interruption because the Fed’s culture is one in which all leaders are focused on achieving the goals the Fed sets forth in the Federal Reserve Act,” said Loretta Mester, former president of the Federal Reserve Bank of Cleveland and associate professor of finance at the Wharton School of the University of Pennsylvania. “I hope that those chosen to lead will continue that culture that has served this country so well.”

Anne Walsh, chief investment officer at investment management firm Guggenheim Partners, said she believes that no matter what happens, the composition of the Fed will become more dovish.

“It means we’re back to my concept and belief of a much lower neutral rate going forward, which should be beneficial…for the interest rate sensitive parts of the economy, the consumer down to some level, for example,” Walsh said at a Yahoo Finance investment event.

Next year will also see the annual rotation of four Fed regional chairs. Each year, five of the 12 regional bank presidents get a vote — four rotate each year, and the fifth, the Federal Reserve Bank of New York, has a permanent vote. 2026 will see the Fed presidents in Cleveland, Dallas, Philadelphia and Minneapolis join as voting members, while Kansas City, Chicago, Boston and St. Louis will rotate.

All four voting regional bank presidents were hawkish.

Boston Fed President Susan Collins said this week that while she supported lower interest rates at the last policy meeting, the bar for further rate cuts is “relatively high” and that it will likely be appropriate to keep interest rates at current levels “for some time.”

Alberto Muslim, president of the Federal Reserve Bank of St. Louis, said this week that he supports cutting interest rates at the latest policy meeting, but going forward “we need to proceed and tread carefully because I think there is limited room for further easing without monetary policy becoming too accommodative.”

He warned that inflation remains at 3%, and interest rates are currently close to neutral – a level designed to neither stimulate nor slow economic growth. “I think we need to continue to rely on inflation above the target level while providing some support to the labor market,” he said.

Jeff Schmid, president of the Federal Reserve Bank of Kansas City, emphasized Friday that he believes inflation is “still very high,” and that although tariffs will likely contribute to higher prices, his concerns are much broader than tariffs alone, including rising electricity and health care prices. He objected to the Fed’s interest rate cut in September.

Read more: What is inflation and how does it affect you?

Meanwhile, Chicago Fed President Austan Goolsbee previously told Yahoo Finance that the threshold for a cut again is higher, noting that nervous inflation has been above the Fed’s 2% target for nearly five years and heading in the wrong direction.

It also appears that the regional Fed bank presidents who will vote next year may lean towards tightening monetary policy. While the addition of Philadelphia may lead to moderation on the committee, Minneapolis Fed President Neel Kashkari expressed reservations about cutting interest rates further, citing the resilience of the underlying economy. Both Cleveland Fed President Beth Hammack and Dallas Fed President Lori Logan have made clear they are more concerned about inflation and are reluctant to cut interest rates.

These members can create a section next year.

“Next year, we can expect a more hawkish Fed regional composition coupled with a more dovish board,” said Gregory Daco, chief economist at EY-Parthenon. “However, it is important not to oversimplify the situation by envisioning only two factions.”

Daco said he envisions three groups. The new Fed Chairman, as well as Fed Governor Bowman and the governor who will replace Fed Governor Steven Meiran, are expected to fall in line with the dovish camp. Hammack of the Cleveland Fed, Kashkari of the Minneapolis Fed, and Logan of the Dallas Fed are expected to fall into the hawkish camp. Finally, Fed Governors Jefferson, Waller, Williams, and Cook, and Philadelphia Fed President Anna Paulson will belong to a more neutral group.

Jennifer Schoenberger covers the Fed, Congress, the White House, Treasury, the SEC, economics, cryptocurrencies, and the intersection of Washington politics with finance. Follow her on X @genefrism And on Instagram.

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