Franklin Templeton: Fed’s Policy Divergence for 2026 May Heighten Market Volatility

Key Takeaways:Franklin Templeton warns of growing divergence in Fed’s 2026 policy outlook.The latest rate cut seen as a risk-management move focused on labor market weakness.Markets expect more cuts, but the Fed resists endorsing a lower-rate trajectory.Fed’s 2026 Policy Uncertainty Raises Volatility RisksFranklin Templeton portfolio manager Jack McIntyre has cautioned that the U.S. Federal Reserve’s divergent policy views for 2026 could increase market volatility next year.Speaking after the Fed’s rate cut, McIntyre said the move was primarily a risk-management operation, signaling the central bank’s shift toward addressing the sluggish labor market.“Given the lag in the effectiveness of monetary policy and the fact that labor market statistics are lagging economic indicators, it is reasonable for the market to expect more rate cuts,” McIntyre said.Markets Expect More Cuts, Fed Pushes BackDespite growing market confidence in further easing, Franklin Templeton investment strategist Larry Hatheway emphasized that the Fed is not yet willing to acknowledge the aggressive low-rate path priced in by markets.“The challenge facing investors,” Hatheway explained, “is that while the market has priced in significant Fed easing, the Fed itself remains reluctant to validate those expectations.”This disconnect could leave markets vulnerable to heightened volatility in 2025 and beyond, particularly as investors attempt to position ahead of 2026 policy uncertainty.