Strong Q3 US Growth Could Cap Fed Rate Cuts At One Or Two In 2026, Says Schwab's Collin Martin

The strategist also pointed to strong consumer spending in the third quarter despite a cooling labor market.

• According to data from the CME FedWatch tool, the probability of a 25-basis-point rate cut in January is now 13.3%, down from 24.4% a week ago.
• The Bureau of Economic Analysis reported that the U.S. economy grew at an annualized rate of 4.3%, higher than the Dow Jones forecast of 3.2%.
• Fed Governor Stephen Miran warned earlier this week that if the central bank does not lower policy rates further, there could be a rise in recession risks.

Collin Martin, head of fixed income research and strategy at Schwab Center for Financial Research, on Wednesday stated that a strong U.S. gross domestic product (GDP) print in the third quarter (Q3) should dissuade the Federal Reserve from lowering policy rates more than twice in 2026.

“Strong growth like this should prevent the Fed from cutting much more than one or two times next year and is one more reason that long-term yields should stay elevated,” said Martin.

According to data from the CME FedWatch tool, the probability of a 25-basis-point rate cut in January is now 13.3%, down from 24.4% a week ago.

The Bureau of Economic Analysis reported that the U.S. economy grew at an annualized rate of 4.3%, higher than the Dow Jones forecast of 3.2%. The report stated that consumer spending, exports, and government spending drove the GDP growth in Q3.

Strong Consumer Spending

Schwab pointed to consumer spending being impressive in late summer and early fall. Personal consumption rose by 3.5% during the period, compared to the 2.5% growth seen in the second quarter (Q2).

“The consumer continues to drive the economy, despite concerns about the cooling labor market,” Martin added.

Driving the strength in consumer spending during the quarter were recreational goods and vehicles, and international travel, according to the BEA report.

Mohamed El-Erian, Chief Economic Advisor at Allianz, noted in a post on X that resilient consumer spending has been joined by an AI-led capital expenditure surge.

Miran’s Warning

Fed Governor Stephen Miran warned earlier this week that if the central bank does not lower policy rates further, there could be a rise in recession risks.

“If we don’t adjust policy down, then I think we do run risks of rising recessions. I don’t think it’s too late to prevent that, and so, I think it’s important that we keep on adjusting our policy rate down,” he said.

Jeremy Siegel, professor emeritus of finance at the University of Pennsylvania’s Wharton School of Business, stated on Tuesday that cooling inflation gives the Federal Reserve more room to lower the policy rate further. Eventually, he expects additional easing that will take rates closer to the low-3% range.

However, the BEA report stated that the Fed’s preferred inflation gauge, the Personal Consumption Expenditures (PCE) price index, rose 2.8% in Q3, compared with 2.1% in Q2.

The Fed has cut rates by 75 basis points in 2025, following three consecutive 25-bps cuts in September, October, and December.

Meanwhile, U.S. equities declined in Wednesday’s pre-market trade. At the time of writing, the SPDR S&P 500 ETF (SPY), which tracks the S&P 500 index, was down 0.03%, the Invesco QQQ Trust ETF (QQQ) declined 0.02%, while the SPDR Dow Jones Industrial Average ETF Trust (DIA) fell 0.03%. Retail sentiment around the S&P 500 ETF on Stocktwits was in the ‘bullish’ territory.

The iShares 7-10 Year Treasury Bond ETF (IEF) was up 0.07% at the time of writing.

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