The International Monetary Fund (IMF) has signalled that the US Federal Reserve is nearing the end of its rate-cutting cycle, warning that resilient growth, tariff-driven price pressures and large, persistent fiscal deficits leave only narrow room for further easing, even as political pressure for deeper cuts intensifies.

In its 2026 Article IV assessment, the fund said it was appropriate for the Federal Reserve to lower interest rates during 2025 as job growth slowed and inflation retreated. However, under its baseline outlook, the federal funds rate is expected to settle in a range of 3¼ to 3½ per cent by end-2026 — a projection that implies most of the easing phase is already behind it and that any additional cuts should be modest.

Crucially, the fund added that the ex ante real policy rate should remain broadly unchanged over the coming year. In practical terms, that means it does not want overall financial conditions to loosen significantly from here, even if the nominal policy rate nudges slightly lower.

The Fed itself has already shifted to a more cautious stance, pausing rate cuts at its January meeting after three reductions late last year and holding its benchmark rate in the mid-3 per cent range. Markets still expect some additional easing, but the IMF’s projections point to a relatively flat path unless the economy weakens more sharply than anticipated.

That caution reflects a simple judgement: the US economy is cooling, but it is not weak. Output grew by 2.2 per cent in 2025 and is projected to expand by about 2.4 per cent this year. Unemployment remains close to 4 per cent, and although job creation has slowed markedly, the labour market is still judged to be near full employment. Those conditions do not support a rush to aggressively cheaper money.

At the same time, the policy backdrop is becoming more complicated. Tariffs imposed as part of the administration’s economic strategy are expected to lift the price level by about half a per cent in the near term. Because those tariffs act as a supply shock — raising costs rather than fuelling demand — monetary easing is a blunt tool. The fund’s message is that cutting rates too far in response to a supply-side price rise would risk reigniting broader inflation rather than curing the problem.

Fiscal policy is pulling in the opposite direction from traditional consolidation. General government deficits are projected to remain in the 7–8 per cent of gross domestic product (GDP) range in coming years, with public debt climbing towards roughly 140 per cent of GDP by 2031. The fund stops short of predicting any sovereign stress, but it is explicit that the debt path represents a growing medium-term stability risk and a complicating factor for monetary policy.

Loose fiscal settings alongside solid growth, the IMF suggests, reduce both the need and the space for large interest rate cuts. In that environment, a more aggressive easing cycle could be read by markets as monetary policy bending towards political or fiscal convenience rather than strictly to the inflation and employment data.

That political backdrop is unusually loud. President Donald Trump has repeatedly called for deeper and faster rate cuts, arguing that lower borrowing costs are needed to sustain the expansion and ease the federal debt burden. He has also signalled that support for easier money will be a key test for his choice of the next Fed chair — commentary that analysts see as testing longstanding norms around central bank independence.

It is against that backdrop that the IMF chose to deliver an unusually direct defence of the Fed’s autonomy, describing its policy credibility as a “highly valuable asset” that must be carefully guarded. Monetary decisions, it said, should remain independent and firmly focused on the statutory goals of price stability and maximum employment.

The fund also backed recent operational moves by the central bank — including halting the run-off of its balance sheet, stepping up reserve management purchases and strengthening standing repo facilities — as targeted steps to keep money markets functioning smoothly without sending a signal of broad policy loosening.

Taken together, the message is less about where rates are today and more about how narrow the path has become. Inflation is easing and the labour market is cooling, but growth is still solid and fiscal policy remains expansionary. With tariffs adding a small but real supply-side price shock, the space for heavy-handed monetary stimulus is limited.

In effect, the IMF is warning that the easy part of post-inflation normalisation is over. From here, any further rate cuts will have to be small, data-driven and clearly insulated from political and fiscal pressure. What is at stake, it suggests, is not just the next quarter-point move, but the credibility of the Fed itself — a resource that, once eroded, is far harder to rebuild than to lose.