Weekly Economic Update: December 16th, 2025
Fed cuts rates but signals pause
The debate over whether or not the Federal Reserve would cut rates at its final meeting of 2025 is finally over. The Fed cut rates another 25 basis points (0.25%) last week, taking them to a target level of 3.50-3.75%.1,2 A sinking jobs market and whatever inflation data we had (stale as it may be) nudged the Fed to cut rates for a third time this year.
We should get verification that inflation is hovering around 3% soon, as the data finally begins to catch up after the 43-day government shutdown.3 The Federal Open Market Committee (FOMC) delivered a Christmas gift after all, even though Fed Chair Jerome Powell poured cold water on hopes that such a cut would arrive before the holidays. Markets swooned following his previous comments, but somehow the landscape changed in Powell’s eyes between October and last week.
The Fed has cut the policy rate by 1.75 percentage points in total since September 2024. Powell cited growing concern about the labor market as the explanation for the latest cut in his post-meeting press conference, but Fed officials were more optimistic about economic growth next year.4
The meeting was not without some intrigue, as three members dissented.5 Two (Austan Goolsbee, Chicago Fed, and Jeffrey Schmid, Kansas City Fed) were in favor of no cut, while Stephen Miran, President Donald Trump’s latest appointee to the Fed, argued for a bigger cut.
At his press conference, Powell signaled a rate-cut pause in January and that we should expect perhaps only one cut in 2026.6 Markets, on the other hand, are expecting two cuts next year. So, we’re right back to guessing about what the new year will bring. (More on the Fed’s 2026 projections below.)
Markets initially rejoiced at the cut last week, sending the S&P 500 and the Dow to new records on Thursday.7,8 The Nasdaq didn’t fare as well, hampered by lingering doubts over Big Tech valuations and grandiose AI infrastructure spending.9 Those same lingering doubts turned into fear and a market pullback on Friday to end the week.
There was talk of rotation out of those sectors into less expensive places like materials, industrials, financials, health care, retail and consumer-oriented areas, which, if true, bodes well for a strong economy next year.10 That may be wishful thinking; to be honest, we’re not buying it.
December is a notorious time for traders and portfolio managers to take gains and window dress their portfolios to lock in their performance for the year. Let’s be grateful for a solid year overall. We may still see the S&P 500 creep up to 7,000 by December, but even if it doesn’t, it’s been a tumultuous but remarkable year.
How much confidence do we have in the Fed’s 2026 projections?
Let’s talk more about the Fed and Powell’s comments about a pause. There will be multiple Fed meetings next year, with tons of new data to react to. After the way this year has played out, who knows what else we will have to deal with.
One thing is clear: President Trump wants Powell gone. Powell will only hold sway as the chairman for three more Fed meetings (January, March and April). He will remain at the Fed, but he will not be the chair when Trump replaces him in May. All this pausing talk or “one cut next year” holds very little relevance because Powell will no longer be the chair or have press conferences after every meeting.
Based on who Trump selects, we will have a whole new dynamic in May, and there will be talk of the loss of Fed independence and increased politicization.11 But that’s already been happening, as some of Powell’s moves have appeared politicized.
Whatever happens, the markets will react to whatever the new Fed throws at us. Right now, however, it appears that 2026 will be a strong year for markets — with or without added Fed drama.
Coming this week
- Now that the Fed is done meeting, markets will start fretting about next year. The Fed Funds rate is now around 3.5%, but the 10-year Treasury isn’t really cooperating as it remains above 4%.12
- We will hear from a bunch of Fed officials this week, as they give their take on last week’s meeting.
- We’ll also start getting data again this week! On Monday, we’ll see the Empire State and home builder confidence, followed by the November jobs report and October retail sales on Tuesday.
- Wednesday will feature MBA mortgage applications. Thursday will be a full day, with weekly unemployment and the Philly Fed manufacturing survey. We’ll also get the November consumer price index (CPI), which is expected to stay at or above its current 3.0% level.
- We will end the week with existing home sales and consumer sentiment, which is expected to tick upward from 53.3 to 53.8.13
Sources:
1 Jeff Cox. CNBC. Dec. 10, 2025. “Divided Fed approves third rate cut this year, sees slower pace ahead.” https://www.cnbc.com/2025/12/10/fed-interest-rate-decision-december-2025-.html. Accessed Dec. 14, 2025.
2 Federal Reserve Bank of New York. “Effective Federal Funds Rate.” https://www.newyorkfed.org/markets/reference-rates/effr. Accessed Dec. 14, 2025.
3 Trading Economics. “United States Inflation Rate.” https://tradingeconomics.com/united-states/inflation-cpi. Accessed Dec. 14, 2025.
4 Federal Reserve. Dec. 10, 2025. “Transcript of Chair Powell’s Press Conference, December 10, 2025.” https://www.federalreserve.gov/mediacenter/files/FOMCpresconf20251210.pdf. Accessed Dec. 14, 2025.
5 Federal Reserve. Dec. 10, 2025. “Federal Reserve issues FOMC statement.” https://www.federalreserve.gov/newsevents/pressreleases/monetary20251210a.htm. Accessed Dec. 14, 2025.
6 Victoria Guida. Politico. Dec. 10, 2025. “A split Fed cuts interest rates but signals it’s likely to pause.” https://www.politico.com/news/2025/12/10/federal-reserve-interest-rates-cut-00684371. Accessed Dec. 14, 2025.
7 Yahoo! Finance. “S&P 500 (ˆGSPC).” https://finance.yahoo.com/quote/%5EGSPC/. Accessed Dec. 14, 2025.
8 Yahoo! Finance. “Dow Jones Industrial Average (ˆDJI).” https://finance.yahoo.com/quote/%5EDJI/. Accessed Dec. 14, 2025.
9 Yahoo! Finance. “NASDAQ Composite (ˆIXIC).” https://finance.yahoo.com/quote/%5EIXIC/. Accessed Dec. 14, 2025.
10 Hamza Shaban. Yahoo! Finance. Dec. 13, 2025. “AI fears are fueling a welcomed stock market rotation away from Big Tech.” https://finance.yahoo.com/news/ai-fears-are-fueling-a-welcomed-stock-market-rotation-away-from-big-tech-110003668.html. Accessed Dec. 14, 2025.
11 Zachary B. Wolf. CNN Politics. Dec. 13, 2025. “A key decision of Trump 2.0 approaches — picking a Fed chair.” https://www.cnn.com/2025/12/13/politics/federal-reserve-chairman-kevin-hassett-kevin-warsh. Accessed Dec. 14, 2025.
12 CNBC. “U.S. 10 Year Treasury.” https://www.cnbc.com/quotes/US10Y. Accessed Dec. 14, 2025.
13 MarketWatch. “U.S. Economic Calendar.” https://www.marketwatch.com/economy-politics/calendar. Accessed Dec. 14, 2025.
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