Powell says Fed is “well positioned to wait and see”
By Chad Roope, CFA ®
Chief Investment Officer
On Wednesday, Dec. 10, the Federal Reserve (Fed) cut the Fed Funds Rate by one-quarter of a point (0.25%) to 3.5% as widely expected. The Fed Funds Rate is the baseline interest rate the Fed sets to control other interest rates and money supply throughout the economy. Lower interest rates usually stimulate economic growth as they make money less expensive to borrow, and higher interest rates usually slow economic growth as they make money more expensive to borrow. The Fed raises and lowers rates to try and balance inflation and employment, with the goal of fostering solid economic growth that supports full employment without stoking excessive inflation. As seen in the chart below, the Fed has now cut rates by 1.75% from 5.25% to 3.5% since September 2024, after an aggressive hiking cycle and pause that started in March 2022.
The hikes that started in March 2022 were designed to slow economic growth to stave off one of the largest inflation spikes in U.S. history post-COVID. The Fed then judged in September 2024 that the mission had largely been accomplished and that rates needed to come down to support employment and the economy.
Now, however, we have likely entered a new phase. Fed Chairman Jerome Powell indicated last Wednesday that the Fed is now “well positioned to wait and see” given the rate reductions since September 2024. We think this means they will hold interest rates steady for some time until economic data changes sufficiently in either direction to warrant a change. It appears the Fed now thinks employment, inflation and the economy are roughly in balance. In fact, they slightly increased their projections of economic growth in 2026 and noted that a recent uptick in inflation is mostly related to one-time effects of tariffs. Only the future will tell if their judgment proves accurate, but we generally agree with their assessment at present.
We will post our 2026 Outlook in January, but broadly, we expect the economy and earnings to remain solid in 2026, which should support financial markets. The Fed cuts over the last year or so are just now beginning to work in the economy, which should be supportive. We also expect tax cuts from 2025 Washington tax legislation to be stimulative in early 2026 as well. As such, our base case calls for solid, but more modest financial market performance in 2026, with diversifying asset classes potentially playing a larger role. More to come in January.
Sources:
https://fred.stlouisfed.org/series/DFEDTARL#
https://www.federalreserve.gov/newsevents/pressreleases/monetary20251210a.htm
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