Why the Federal Reserve May Cut Rates in 2026, SBI Explains

Disinflation in the United States is likely to continue through 2026 as weakening jobs, stagnant incomes, fragile credit growth and rising AI adoption may push the Federal Reserve towards easing interest rates, according to an SBI report.

The report identifies seven major economic trends that are steadily weakening inflationary momentum and reshaping the outlook for monetary policy.

Softening Labour Market

One of the most significant signals is the gradual cooling of the US labour market. Unemployment has climbed from an average of 3.6 per cent in 2023 to 4.4 per cent by December 2025.

At the same time, full-time job creation has slowed, reflecting weaker hiring conditions and reduced wage pressures.

Stagnant Household Incomes

Real disposable personal income has shown only marginal growth over the past year. This stagnation indicates that American consumers are entering 2026 with limited spending power, which may curb demand and keep inflation in check.

Tight Credit and Weak Investment

Monetary conditions remain fragile, with commercial and industrial loan growth staying in negative territory throughout 2025. This contraction suggests subdued business confidence and lower investment activity, further dampening economic momentum.

Reduced Fiscal Support

Fiscal stimulus has also weakened. The US budget deficit has narrowed significantly since 2021, reflecting lower government spending. Reduced fiscal support means less demand-driven inflation in the economy.

Falling Industrial Capacity Use

Capacity utilisation has been declining since its 2022 peak and stood at just over 76 per cent in late 2025. Lower utilisation signals weaker industrial output and reduced pricing power for manufacturers.

Tariffs and Economic Uncertainty

While tariffs are often viewed as inflationary, Federal Reserve research cited in the report suggests they can slow economic activity and raise unemployment. This, in turn, puts downward pressure on prices, though rising uncertainty may hurt investor confidence.

AI’s Disinflationary Impact

The growing use of artificial intelligence is emerging as a structural force in lowering costs. As firms replace labour with automation, wage growth and production costs may fall, contributing to long-term disinflation and slower economic growth.

Outlook for Interest Rates

Taken together, these trends point to sustained disinflation in 2026. With weakening demand, cautious consumers, and technological disruption, the Federal Reserve may find increasing justification for cutting interest rates in the coming months, the SBI report concludes.

(With inputs from ANI)