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Enough consensus?

The Federal Open Market Committee today is expected to ease monetary policy by 25 basis points for a third straight meeting, as risks remain to both sides of the Fed’s mandate of full employment and price stability. That would bring the federal funds rate target range to 3.50%-3.75%, down from the 4.25%-4.50% level in August 2025 and from the cycle peak of 5.25%-5.50% it hovered at from July 2023 through August 2024. Even with the government shutdown resulting in uneven and delayed official economic data, traders have increased their bets that the central bank will cut its benchmark rate, though the expectations have been volatile.

Backdrop: Recall that after October’s meeting, Fed Chair Jerome Powell said that a December rate cut was "not a foregone conclusion," though downside risks to the labor market seem to have outweighed any upside risks to inflation. Inflation has been elevated around 3%, above the central bank’s 2% target, though many now expect it will continue to come down through 2026 (or at least there won’t be a resurgence). Seeking Alpha subscribers were more divided on whether a pause is warranted, according to the latest SA Sentiment poll.

Even if the Fed cuts, it doesn’t mean that rates are automatically going to go down or unfreeze the housing market, especially across the longer end of the yield curve. Price pressures have been sticky, and the U.S. government has been running large budget deficits, requiring the Treasury Department to increase its issuance. It’s coming at the same time as a flood of corporate debt hits the market amid the AI buildout, as well as municipal bond issuance, meaning investors are demanding larger premiums.

Direction needed: The biggest focus that will likely determine stock market direction will be the Fed’s "dot plot," given its forward-looking nature and where interest rates are going in 2026. "Rising dissent signals future rate cuts may be less certain, with a long pause possible after December," said SA Investing Group Leader Mott Capital Management, though that could change as the composition of the FOMC shifts into the new year and Fed Chair Jerome Powell finishes his term in May. The consensus-reaching tradition may be over, adds Maxime Darmet, a senior economist at Allianz Trade, outlining that the Fed may start acting "very much like a European central bank — very split, very divided." (4 comments)

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