- Fixed Income Portfolio Manager
Denmark, Institutional
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The Fed continues cutting rates amid growing divisions
At its December 2025 meeting, the Federal Open Market Committee (FOMC) lowered its target range for the federal funds rate by 25 basis points (bps) to 3.50% – 3.75%. The decision, which came with a divided committee, reflects growing concerns over labor market weakness and persistent inflation pressures. While US Federal Reserve (Fed) Governor Stephen Miran advocated for a more aggressive cut of 50 bps, committee members Jeffrey Schmid and Austan Goolsbee dissented in favor of keeping rates steady. There’s a clear split among the committee members: Doves prioritize shoring up a weakening labor market with continued easing, while hawks remain focused on persistent inflation and keeping policy rates unchanged.
The recent US government shutdown has led to gaps and delays in economic data releases, increasing uncertainty and making it more challenging for the Fed to determine appropriate policy rate adjustments. This said, a trove of data releases is scheduled for the week of December 15. Fed Chair Jerome Powell highlighted that, due to data collection issues during the shutdown, the quality of the current data isn’t up to the usual standards and explained that policymakers will likely wait for data due in January to make any decisions about the next policy action. From my perspective, this allows markets to downplay any upside surprises in data and allows risk assets and US Treasuries potentially to experience less volatility in the next few weeks than we’d previously feared.
Labor market showing signs of strain
Payroll growth has shown renewed strength, with the September report surprising to the upside (+119k), yet the unemployment rate ticked up to 4.4% amid higher labor force participation. Powell shared during the press conference that he believes payroll growth has been overstated recently, indicating payroll contraction of roughly 20,000 jobs per month on average over the last few months.
Core personal consumption expenditures (PCE) remain above the Fed’s 2% target, though the FOMC’s updated projections suggest inflation will moderate to 2.5% over the next year. Fiscal stimulus, AI investment, and deregulation are likely to bolster growth in 2026 relative to 2025, but evolving tariff policies add complexity to the inflation outlook. The Fed’s move this December brings policy closer to neutral. In fact, Powell stated his belief that the policy rate is now “within a broad range of plausible estimates of neutral.” While the median forecast for policy rates shows one additional cut in 2026, futures markets are pricing in two additional cuts, perhaps reflecting a more dovish perspective in light of an expected turnover across several board seats throughout the year.
Political dynamics and Fed independence
The presidential administration plans to interview candidates for the next Fed Chair. While we expect an announcement on this front in early 2026, Kevin Hassett has recently emerged as the leading candidate to succeed Powell. Market participants and media reports have highlighted Hassett’s alignment with the administration’s preference for more accommodative monetary policy. His potential appointment has already influenced market expectations, with investors anticipating a shift toward lower interest rates and easier financial conditions.
This development comes at a critical time for the Fed, raising questions about future policy direction and the institution’s independence in the face of leadership transitions, since there are several key appointments and retirements on the horizon. The Fed’s independence is under scrutiny as the new year approaches and the FOMC’s ability to maintain credibility and impartiality will be critical as it navigates economic crosscurrents. A reduction in Fed independence will likely lead to a steeper yield curve and higher longer-term US Treasury yields — dynamics at odds with the current administration’s goals.
Looking ahead
The Fed’s December cut underscores a cautious easing bias as the economy continues through a period of heightened uncertainty. While growth is expected to remain above trend, the labor market is adjusting and inflation risks persist. The committee’s challenge will be to balance these forces while maintaining its dual mandate and institutional integrity.
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Monthly Market Review — October 2025
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