You get plenty of well-researched eco pieces written by the smartest PhDs in the world. Massive teams with hundreds of millions of dollars pouring into research. Access to the best data. Collaboration with brilliant partners. They win awards and get invites to appear on Bloomberg. They provide thoughtful quotes to the WSJ. They have peer-reviewed papers and guest lecture at the best universities. They are putting out incredibly detailed 2026 forecasts with the best supporting evidence that money can buy. They have all the training you would expect out of world-class thought leaders.
You know what else they have that I don’t?
Pride.
Buckle up, time for the 2026 Lead Pipe Lock Predictions Guarantees™. What I lack in resources, intelligence, and credentials I more than make up for with chutzpah.
As always, I also review last year’s Lead Pipe Lock Guarantees™ to see how I did. You can probably just skip that part, the TLDR is that I was right about everything as per usual. I predicted 0.75% of rate cuts and I don’t handle success well, so I might get a little insufferable…just ask JMo or Hermosa Mark.
Before we jump in, here’s one small gift for the interest rate nerds out there. We have totally revamped our forward curve to add all sorts of analytical tools. Check it out here: Greatest Forward Curve in the World (probably) for cool new features like:
- Historical resets plus every variety of forward curve reset you could ask for
- Charting
- Treasury curves and implied forwards
- Swap curves
- Fed cut/hike probabilities
- Rate shocks
- Easy copy and paste so you don’t even have to download anymore
Our forward curve already gets downloaded more than 11,000 times a month, which tells me there are a lot of nerds out there just like us. You are our people. Happy holidays ya filthy animals.
This is what Gemini thinks unwrapping a forward curve present looks like.
Lead Pipe Locks™ for 2026
10 months ago, brokers were toasting their brilliant decision to get matching “Survive til ‘25” tramp stamps with the T10 pushing below 4.4% and transaction volume surging.
Then the oddly named Liberation Day slammed the brakes on the momentum.
The T10 plunged to 4.0%, then surged back to 4.6%, and everyone went pencils down. Quite the rollercoaster ride.
I’m not sure 2026 will be much calmer.
Lead Pipe Lock #1 – The 10 Year Treasury Will Finish Below 4%
I made the exact same call last year, but at that time the T10 was at 4.60% and would hit 4.80% a week later. This prediction is entirely dependent on the Fed cutting more than expected, which will come about because of the labor market wheels falling off. We looked for the average spread between Fed Funds and the T10 during extended periods of no rate changes. The typical spread is 0.95%.
The market is pricing in about two cuts in 2026. If the Fed instead cuts 1.00%, that implies the T10 should move lower by about 0.50% (to 3.75%-ish). If the Fed doesn’t cut at all, I am going to be really wrong. Bonus Prediction: I haven’t heard a single other person talk about this, so I feel like I am out on a limb here…but I can’t shake the feeling that the QE machine might get turned on again. I can see Trump pushing to Make Housing Affordable Again™ and pushing the Fed to buy bonds to drive mortgage rates down.
Lead Pipe Lock #2 – The Fed Will Cut at Least 1% or Not at All
I don’t know how to say this…but I’m kind of a big deal. In December 2024, I predicted 0.75% of cuts in 2025 and that’s exactly what we got. The year before, I called for 1.25% when most were saying no cuts and the Fed cut 1.00%.
Why the Fed might not cut at all
- Fiscal tailwinds set into motion in 2025 actually show up in 2026
- Labor market hangs in there
- Inflation refuses to move lower
- Productivity gains continue
- r* moves up
Why the Fed will cut at least 1%
- Labor market falls apart
- Inflation moves lower
- FOMC composition will slant dovish
Most Fed officials believe the equilibrium rate (r* + inflation) is somewhere between 3.0% - 3.5%. With inflation running above target, they are inclined to leave rates slightly restrictive. No cuts in 2026 will be like tapping on the brakes.
The Fed’s own projection for Core PCE at year-end 2026 is 2.4%. That’s still above target and calls for slightly restrictive rates to remain in place…keep tapping on the brakes…and suggests they won’t need to cut at all.
But in another universe, the wheels fall off the labor market. The Fed not only has to let off the brakes, it has to start pressing on the gas pedal. That means rates have to go below the equilibrium.
You tell me what happens to the labor market and I can tell you how much the Fed is going to cut.
And unless you just started reading this newsletter today, you know how I feel about the labor market.
Lead Pipe Lock #3 – Inflation Will Move Lower
“The sky is falling!!!!! Inflation is RAMPANT!!!!!! Insert structural change and then another structural change and here’s me parroting James Bianco and John Mauldin to prove I’m a contrarian and smarter than you! And here’s a graph that proves my point!!!!!!!” – someone like JMo but definitely positively not JMo
Fine, make me pull out a graph, too. Can we talk about oil for a second?
Oil quadrupled overnight in 1973 because of the OPEC embargo. Imagine waking up this morning and learning that oil is now trading at >$200/barrel.
Within six years, it was literally 10x higher than before the embargo. The same move today would be $500/barrel That would be inflationary. But with oil trading at $55/barrel, or a few more trillion dropped on the economy, I just don’t see how we can have rampant inflation. “But tariffs!!!!!!” - someone like JMo but definitely positively not JMo
From Bloomberg’s Anna Wong, “One notable takeaway from the October-November CPI report is that inflation in most tariff-exposed goods categories is peaking or has already peaked.” “But M2 money supply!!!!! Milton Friedman!!!!! Here’s another graph!!!! Take THAT!!!!!” - someone like JMo but definitely positively not JMo
You’re making me get a graph again - you’re a real jerk for doing that. Here is the velocity of money. Think of this as money changing hands.
If the government handed everyone $10,000 but law required it to sit in an account earning 0% interest for the next 10 years…would we have inflation?
Look at the graph below. Do you think it’s a coincidence that inflation was surging while the velocity of money was surging? The government dropped trillions of dollars on the economy, but rather than it sitting in an account, everyone got into a bidding war with each other for everything. This bidding war drove up prices, not the mere creation of money.
In fairness to the JMo crowd, I think structural shifts to inflation probably have occurred. I say the same about the labor market – 4% unemployment is the new 5%. For inflation, maybe 3% is the new 2%?
Where we differ is that I believe 3% inflation is largely indistinguishable from 2% inflation. Can anyone articulate to me why 2% is chef’s kiss but 3% is the end of the world? I’ve already proven to you that the 2% target was made up by a Kiwi. Can you actually tell the difference between the two?
If you spend $1k per month at the grocery store, the cumulative difference between 2% and 3% over the next 36 months of groceries is $744. That averages $21 per month.
If the only way to get inflation back to 2% is to make 3mm Americans lose their jobs, will it be worth it?
The real lesson is to avoid those nasty 9% years like we saw in 2021/2022/2023 because even if the increases have slowed, the absolute level of prices we are left to deal with is very painful.
“But wage pressures!!!!!!!” - someone like JMo but definitely positively not JMo
RenMac’s Chief Economist Neil Dutta has written extensively about the cooling labor market, and wages are no exception. Wage pressures are plunging.
Core CPI just came in at 2.6%, well below the forecasted 3.0%. Some of that was a quirk in the absurd Owners’ Equivalent Rent calculation, but even Waller thinks that only amounted to about 0.1% difference.
Inflation will not be as big of an issue as jobs.
PS - I hope Bianco does an annual review of his bold predictions like I do. Here was his call in January 2024.
Lead Pipe Lock #4 – Labor Market Roll Over
On a long enough timeline, I am always right…I just sometimes need a really long timeline.
Firms simply aren’t hiring. Hiring rates (3.2%) are at their lowest level since 2010 when the UR was 9%. Private hiring fell to 3.1%, the lowest since 2011.
That means every layoff is painful because it will be harder to find a job.
- We’re adding 0 jobs/month right now, down just a hair from the peak 550k jobs/month in 2021
- Unemployment rate is now 4.6%, up a full 1.0% from its low
- NFP was negative 105k the last two months
- Every single private job gain came from either private education or healthcare
- Quits rate is at 1.8%, the lowest since 2015 when the UR was 6.5%
BCA’s Employment to Population Ratio
San Francisco Fed research showing that we are no longer at “full employment”
New Century Advisors Chief Economist Claudia Sahm
I’ll stop beating a dead horse, you get the idea. Whatever margin for error we’ve had the last few years has now evaporated if firms don’t start hiring again.
Lead Pipe Lock #5 – Ohio State Repeats
I predicted they would win last year following a loss to Oregon, and I think they win it again this year despite losing to Indiana.
Lead Pipe Lock #6 – So Do the Birds!
But that’s ok because Eagles OC Kevin Patullo discovers the playcalling sheet has a backside and the Birds go on a tear!
Lead Pipe Lock #7 – You Will Never Care More About Fed Composition Than You Will in May 2026
If I were Czar President for a day, I would choose Waller. Despite dovish tendencies, he was among the loudest voices for rapidly hiking rates in early 2022. Then, a year ago he suggested we could experience a soft landing with UR increasing less than 1% (WSJ Waller). I bet you wish Waller wrote a newsletter instead of me, don’t you?
Hassett would be a good pick, too. And since betting markets have him as the favorite, the illustration below assumes Hassett is the next Fed Chair. Regardless of who it is, it will be tough to have a better nickname than Jay$.
The FOMC has 12 voting members, so 7 votes are needed for a change to rates (and things like QE). The Fed Chair itself won’t have a dramatic impact on the vote itself. Instead, there are two key events that will dictate FOMC composition
- Lisa Cook ouster? The Supreme Court hears arguments January 21st and will likely issue a ruling in June, right after Powell steps down as Fed Chair…
- Is “ouster” the weirdest word in the English language?
- But Powell will still have two years remaining on the Board of Governors. Does he stick around to poke the bear ensure Fed independence? Or does he honor tradition and resign from the Board entirely, giving Trump another appointee?
There are two doves already on the Board in 2026:
- Philip Jefferson (Governor)
- Kashkari (Regional Bank President rotating on for a one-year stint as voting member)
If Cook is ousted and Powell resigns, Trump will have 5 appointees plus two doves = a majority. Trump really really really wants Cook ousted and Powell to leave the Board. Of course, if the job market rolls over rates might be plunging anyway.
We’ve put out a lot of complex graphics before (including some that have been blatantly ripped off), but this has been the hardest. The main takeaway is that everything comes down to Powell/Cook, not the next Fed Chair.
Board of Governors have 14-year terms, so they are supposed to be insulated from political interference. I think the next Fed Chair will have a bias to lower rates, but they will still do what they think is best for the economy and trust they can ride out any backlash from Trump. Heck, behind closed doors they might tell everyone to vote against a cut just so they can and tell Trump, “Look, I tried.”
My gut instinct is that Lisa Cook will not be ousted. The Supreme Court is heavily stacked in Trump’s favor, but they have also noted the Fed is a quasi-private enterprise and could use that as an excuse to limit presidential influence. Supreme Court rulings are usually released in May or June, so we don’t even know if that outcome will be known when Powell has to decide whether to stay or go.
Bonus Lead Pipe Lock Prediction: I retain my reputation for best segues in the biz…
Lead Pipe Lock #8 – Powell Will Leave the FOMC Board in May
Until this year, I think Powell viewed his legacy as overcoming inflation without crippling the economy. I know there are people screaming about 3% inflation, but I think with the benefit of hindsight we won’t be so hung up on the difference between 2% and 3%.
Now I think he might view his legacy as the Chair that preserved Fed independence. He will take the temperature of the room in the first half of the year and decide whether he stays or goes. I think he cares deeply about tradition and doesn’t want to draw attention to himself by doing something outside the norms. The bar to remaining on the Board is very high.
Because I think Cook will remain, I think Powell resigns from the Board in May and Trump gets to fill that vacancy.
It’s been a heckuva run Jay$.
Week Ahead
Monday and Tuesday will be crazy with year-end closing sneaking in, but then a sleepy finish to the week with markets closed.
We were promised the next Fed Chair appointment before year-end, so we might get news from the twittersphere at some point.
A Rigorous and Completely Honest and Unbiased Review of Last Year’s Predictions
Lead Pipe Lock #1 – The 10 Year Treasury Will Finish Below 4%
Grade: B –
Note: The T10 was at 4.62% when I wrote that and would hit 4.8% a week later. It was a bold call at the time and we flirted with it.
Lead Pipe Lock #2 – The Fed Will Cut at Least 0.75%
Grade: A++++++++
Note: Warren Min didn’t dub me The Rate Guy for nothing! Cumulatively, the Fed has cut 1.75% over the last two years and I predicted 2.00%. Not too shabby.
Lead Pipe Lock #3 – Labor Market Deterioration Will Dictate Interest Rates
Grade: C+
Note: The market is still overreacting to the initial headline, which surprises me. Plus, I underestimated the impact tariffs would have on interest rates.
Lead Pipe Lock #4 – Core PCE Will Average Below 3%
Grade: A
Note: Core PCE averaged 2.8% even with tariffs, the sky is not falling JMo!!!!
Lead Pipe Lock #5 – Ohio State Will Win the National Championship
Grade: A
Note: I wish I had failed this one.
Overall – that was my best year in a while!
“Even a broken clock is right twice a day” – The Real Boss™
