The Federal Reserve wrapped up its latest meeting with a 25-basis point rate cut, bringing the federal funds rate to a range of 3.5% to 3.75%. Stocks responded positively and moved higher, while bond yields drifted lower. With December underway, many investors are wondering whether this opens the door for a traditional Santa Claus Rally. Based on today’s outcome, the Fed may have provided just enough encouragement.
Powell’s Key Takeaways
Policy Described as Neutral - Powell described the current policy stance as neutral. In the Fed’s view, interest rates are no longer significantly restraining the economy but are not actively stimulating it either. This positioning allows the Fed to watch incoming data before committing to further adjustments.
Pickup in Growth Forecasted - The Fed's updated Summary of Economic Projections (SEP) now forecasts U.S. GDP to grow at a rate of 2.3% (from Q4 of 2025 to Q4 of 2026), an upward revision from the 1.8% projected in September. Powell indicated the baseline expectation for a growth pickup stems partly from the resilience of consumer spending and business investment, as well as the anticipated effects of AI spending on data centers and productivity. Increased productivity over the last several years represents a major tailwind to increased growth without inflation. Outside forecasters generally share the view of a pickup in growth next year.
A Rate Cut and Short-Term Bond Purchases - Along with the rate cut, the Fed announced it will purchase $ 40 billion in Treasury securities on Friday. Officials were careful to note that this should not be viewed as quantitative easing and that the program is expected to last only a few months. Whatever the label, markets should focus on the increased liquidity.
Labor Market Gradually Cooling - Powell noted that the country could be losing roughly 20,000 jobs per month since April, owing to overstated job data. This was an important factor in the decision to cut rates. It reflects the Fed’s growing awareness of cooling labor market conditions.
Inflation Influenced by Tariffs - Powell reiterated that tariffs have contributed to the recent inflation overshoot relative to the Fed’s two percent objective. He does not expect tariff-related pressures to intensify, though he acknowledged the risk that some firms may still implement delayed price increases. As he put it, there is no risk-free path forward regarding the Fed’s interest rate decisions.
The Dot Plot Offers Guidance With Uncertainty - The Fed’s dot plot points to one additional rate cut next year and another in 2027. Powell again emphasized that these projections are not commitments. Economic conditions will dictate the true path of policy.
Voting revealed a divided committee, with Goolsbee and Schmid preferring no cut and Stephen (I like big cuts) Miran advocating for a larger half-point reduction.
Market Response: Cautious Optimism Turning More Confident
Even though some regular economic data was delayed due to the government shutdown, Powell managed to present a tone that reassured markets. The emphasis on employment risks and the acknowledgment of emerging job losses added a slightly dovish tilt.
Stocks moved higher, bond yields eased, and investors were quick to recall the old phrase: Do not fight the Fed. With the likelihood that the next Trump-appointed nominee will lean dovish, market sentiment heading into year-end appears more confident.
The bearish perspective has not disappeared. Skeptics continue to point to stretched valuations, concerns about AI-driven speculation, and doubts that economic growth can remain stable through the transition. Yet for now, easier financial conditions and a friendlier tone from the Fed are giving the bulls clear momentum.
A Constructive Setup for Year-End
The December FOMC meeting delivered a modest rate cut, a temporary liquidity program, and a steady message from Powell. The Fed did not declare victory over inflation, nor did it signal that risks have vanished, but it did step out of the market’s way at a time when sentiment is mixed.
With policy slightly easier and seasonal factors turning favorable, the prospects for a Santa Claus Rally look stronger than they did a few weeks ago. Whether the rally materializes is still uncertain, but the environment is clearly shifting in a more upbeat direction.
At least for now, it seems the bulls have the upper hand, and the bears will need to wait for their opening.
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About the Author – Tim Macarak CFP®
Tim Macarak is President & Head of Wealth Management at Member’s Wealth, a boutique wealth management firm that offers a comprehensive approach to serving individuals, families, business owners, and institutions. The firm’s goal is to preserve and grow its clients’ wealth to endure overtime, while thoughtfully evolving its strategy to suit an ever-changing world. With over 20 years of wealth management experience, Tim and the Members' Wealth team thrive on bringing clarity and confidence to clients' unique situations. He believes everyone needs sound financial advice from someone whose interests are aligned with theirs and is determined to put service before all else.
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