What’s next for the Fed, China’s AI incentive and preparing for the new year.
As expected, the Federal Reserve’s policymakers opted to lower the federal funds target rate this week by 25 basis points to a range of 3.50% to 3.75%. It’s the third consecutive cut since September, reducing rates by 75 basis points overall. Going forward, however, the bar appears to have risen for any additional policy easing with a statement that the “extent and timing” of additional policy moves would depend on changes in the economic outlook.
The decision was far from unanimous, with three dissenting votes. Unsurprisingly, Stephen Miran voted again in favor of a larger 50-basis-point cut, while Kansas City Fed President Jeffrey Schmid—the sole dissenter last meeting—was joined by Chicago Fed President Austan Goolsbee this month in favor of no cut.
Describing the latest policy decision as a close call, Fed Chairman Jerome Powell said the rising discrepancy in the Federal Open Market Committee’s (FOMC) outlook underscores the tension between the two sides of the dual mandate. While all can agree inflation is too high and needs to come down, officials also agree the recent softening in labor market data is a concern. Thus, the differences in outlook lie in how committee members are weighing the risks.
Going forward, with 175 basis points in rate cuts since September of last year, Powell emphasized the committee is well positioned to wait to see how the economy evolves, being strategic and careful in analyzing incoming and delayed data, which still could be distorted. In other words, without a material adjustment in either inflation or employment, central bank policymakers appear poised to pause—a potentially extended pause—heading into the new year. In the meantime, the Fed plans to do some “mini QE” (quantitative easing) by purchasing $40 billion in short-term Treasurys to replenish its strategic reserves ahead of tax season.
Along with the policy announcement and statement, the latest dot plot underscored the dispersion of opinions among FOMC members. While the median forecast anticipates one additional rate cut next year, unchanged from the September forecast, seven Fed officials continue to anticipate no further reduction in policy in 2026, suggesting the Fed’s easing cycle is at or rapidly coming to an end.
The latest read on inflation and labor market openings likely intensified the debate among Fed officials, just as it has among investors.
On the one hand, the Job Openings and Labor Turnover Survey (JOLTS) report as well as the Bureau of Economic Analysis (BEA) readings on inflation showed a lack of hiring momentum, a downtick in core price pressures and easing in consumer activity.
On the other hand, strong enough payrolls numbers, an uptick in headline inflation and the lack of improvement from a still-elevated inflation level warn any further policy easing could risk an acceleration of price pressures, or at the very least, stunt potential progress back towards the 2% target.
I noted with humor that PNC Bank’s longstanding tradition of releasing a “Christmas Price Index”, which calculates the prices of the 12 gifts from the classic song, “The Twelve Days of Christmas” reflected a 13.5% increase in the cost of a partridge in a pear tree. It’s not the bird, it’s the pear tree, and the rising cost of land, labor, and fertilizer costs, that is making the gift more expensive this year. Not as expensive as five golden rings, whose price is up 32.5%, but still.
Nevertheless, markets were elated by the Fed’s decision, rising to new highs, driven by strong rallies in financials, industrials and consumer names, as well as small-caps, even as tech-oriented names displayed caution.
Beyond the Fed, uneasiness around AI overspending and lofty expectations were in focus this week. Oracle, a major player in cloud infrastructure and data centers that rely on AI chips, delivered results that came up short on revenue, though earnings per share easily topped expectations. Investors seemed disappointed in cloud growth and worried about the firm’s higher spending forecast. While chipmaker and infrastructure software provider Broadcom reported results that beat expectations on both revenue and earnings, the stock and broader chip sector remain under pressure, reflecting valuation exhaustion and angst over weak orders vs. rapidly building supply.
Notably, it was reported today that China is launching up to a $70-billion incentive package to bankroll and support its domestic chipmaking industry, including the likes of Huawei Technologies and Cambricon Technologies, pouring more state money into a sector it deems pivotal to its technological conflict with the U.S.
As we move closer to closing the books on 2025, we are working hard with you to wrap up last minute gifting, distributions, administrative updates and portfolio positioning for 2026.
However, turning the calendar will not change some of the market dynamics we face, including geopolitics, tariffs, inflation, a wobbly labor market, a K-shaped economy and artificial intelligence along with its impacts.
Will those dynamics cause the markets to hit a tipping point or to compound to escape velocity in 2026? Perhaps it will be neither, as the markets absorb the risks and opportunities of the complicated landscape and churn along, albeit maybe at a slower pace than they have these last few years. That is the most likely scenario in our view, and we look forward to our partnership with you through the transition into 2026 and our joint navigation of the future, come what may.
Written by a human.