- The Fed cut its policy rate 25 bps in December 2025 to 3.50%–3.75%, marking a third consecutive reduction while signaling patience on further moves.
- Inflation remains above 2% but is forecast to cool toward ~2.4% in 2026, with labor-market softening and delayed data complicating the outlook.
- A split FOMC vote with three dissents highlights heightened uncertainty about the pace and endpoint of easing.
- Lower mortgage rates near 6.15% may modestly support housing activity, but affordability and policy risks such as tariffs could limit gains.
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Monetary policy as of early January 2026 has shifted in favor of caution and balance. With inflation still above target but easing, and unemployment showing signs of weakening, the Fed opted for a modest easing in December while signaling patience for future moves.[1news22][1news12]
The economic outlook hinges heavily on two interrelated variables: inflation trajectory and labor market dynamics. Inflation is expected to decline gradually—Core PCE inflation is projected to be ~2.4% in 2026—and the neutral policy stance suggests that future rate cuts are possible but unlikely to be aggressive absent deteriorating data.[1news21][1news14]
However, risks remain. Tariffs remain a source of uncertainty—while having driven input-cost inflation and dampened employment in some sectors, recent research suggests they may also reduce inflation by suppressing demand. [1news19][1news17] Meanwhile, delayed government data (following a shutdown) complicates real-time assessment of inflation and employment conditions. [1news15][1news13]
The divided vote within the Fed’s decision-making body underscores deep uncertainty and varying assessments of risks. One member, Governor Miran, preferred a 50 bps cut, while two others preferred holding rates steady; this divergence impacts credibility and expectations.
On the housing front, mortgage rate declines are easing cost pressures for homebuyers, but entrenched affordability issues—lower real incomes, higher housing prices—mean gains will be uneven. Housing sales have ticked up month-over-month but remain below the prior year. [1news16]
For investors and corporates, the Fed’s stance means interest rate-sensitive sectors may see some relief, particularly in housing, consumer durables, and longer-duration financial exposures, while inflation-linked instruments will be closely watched.
Strategic implications: anticipate modest rate cuts in late 2026; monitor labor market softness as a potential trigger; corporate earnings likely to face margin pressures if tariffs adjust; housing sector demand conditional on local affordability and mortgage pricing; cautious risk appetite recommended given policy uncertainty. Open questions: Will inflation expectations remain anchored? How fast could unemployment rise? What fiscal/tariff developments could alter the inflation path?
Supporting Notes
- Fed cut its target federal funds rate by 25 bps in December 2025 to 3.50-3.75%, the third consecutive cut.[1news22]
- Three FOMC members dissented: Governor Stephen Miran from a 50 bps cut, Austan Goolsbee and Jeffrey Schmid preferring no change.
- Inflation is still above 2% target, with Fed forecasts expecting core inflation to moderate toward ~2.4% in 2026.[1news21]
- Unemployment rate estimated at ~4.5% in 2025, expected to fall slightly in 2026; labor market described as softening in some sectors.[1news21][1news17]
- Mortgage rates for 30-year fixed options fell to about 6.15% in late December 2025; 15-year rates around 5.44%. [1news16]
- Tariff policies in 2025 reduced hiring by up to 19,000 jobs/month and raised the unemployment rate by ~0.1 point per a Kansas City Fed study. [1news17]
- Elections and fiscal/tariff policy shifts (e.g., potential Supreme Court decisions) also cited as variables affecting business confidence. [1news17][1news18]