Market Minute: December 11th, 2025 - How the Fed’s Rate Cut Is Shaping 2026

Well, that was expected! The Federal Reserve cut its benchmark rate by 25 basis points to a target range of 3.5% to 3.75%. Under the principle that words matter, there are indications that the Fed will again support the U.S. Treasury by making direct purchases of shorter-term securities, as noted in the post-meeting statement. In total, the Fed has allowed nearly $2.5 trillion of maturing securities to roll off its balance sheet. It now plans to ease recent stress in the funding markets by purchasing shorter-dated Bills and Notes.

The stock market certainly welcomed the move: the Dow rose over 1%, the Nasdaq increased 0.2%, the S&P gained nearly 0.7%, and small caps, as measured by the Russell 2000, were up more than 1.3%.

Looking Ahead to 2026: Diverging Views

Pundits are trying to gauge the Fed’s actions for 2026. Based on the Fed’s Dot Plot, there is a forecast of one cut for 2026, as the median estimate of members’ expectations sits at 3.4%. The President certainly wants more rate cuts and feels that the Fed is being too stubborn in reducing rates.

It is important to note that there are diverging opinions among voting members on the Fed’s actions, so there will likely be a very healthy debate at the next meeting. The vote was 9-3 in favor of the rate cut, a clear majority. However, this does indicate that future rate cuts may be harder to pass as we move into 2026.

Balancing Inflation and Employment

As we consider Fed actions, they are focused on both inflation and employment. Inflation is slightly improved, but not where it needs to be, and employment has weakened, but is not a complete dumpster fire. This puts pressure on the Fed to decide which battle to fight. Their statement indicated that both unemployment and inflation have edged up. Ultimately, we believe they want to stave off stagflation at all costs because of the damage that high unemployment and high inflation can inflict on the economy.

Market Reaction and What Comes Next

For the moment, stocks are enjoying the rate cuts. Bond yields fell 3 basis points on the 10-year Treasury and nearly 7 basis points on the 2-year Treasury. The shorter end of the curve will remain more reactive to Fed moves, and the potential purchase of T-bills and notes will certainly influence those yields. We believe the coming months will be critical for understanding the Fed’s direction as new inflation and employment data are released. There will also be much ink spilled on guessing the next Fed Chair. Stay tuned!