Outlook

December 1, 2025

All Eyes On The Fed

If the media has it right, the Federal Reserve’s interest-rate setting committee will head into its December 17-18 meeting pretty much divided.

The case for a third rate-cut this year has been complicated by the October/November shutdown which didn’t allow for timely data collection by various agencies. While there have been efforts by companies and private entities to measure labor’s health, despite the federal government’s plodding and perhaps even antiquated ways of quantifying all things economic, switching data sets at a pivotal time like this for the economy may not be helpful.

What little data is in hand suggests that a toss-up in opinions is not surprising. But should the Fed decide to cut rates for a third time this year to a range of 3.50% to 3.75%, it will likely do so for at least two reasons.

Inflation
The first is consumer inflation and the uncertainty surrounding it.

Cutting through the political fog, the Bureau of Labor Statistics suggests that inflation remains stubbornly high. Based on September data (October is unavailable), year-over-year, consumer prices climbed 3.0%; food is up 3.1%, assuming you don’t drink much coffee (up 18.9%). And if you have a regular dinner of beef, you may be paying as much as 15% more from a year ago. Overall, inflation remains well above the central bank’s long-term target of 2%, though far below Pandemic-era rates.

To address "bread and butter" prices, the Trump Administration is doing an about-face on a wide range of grocery basket items, which should help U.S. consumers and Latin American exporters. Farmers and the broader agricultural sector appear to be facing labor shortages, but as far as I can determine, there’s no clear evidence of that as, of course, the government has been unable to collect data.

It’s much the same deal for manufactured goods where supply chains are far more complicated. And it remains completely unclear as to whether importers, exporters or consumers are picking up the tab for tariffs. That said, tariffs may only be small contributors to today’s rising prices.

According to a study by Oxford Economics, tariffs have only added 0.4 percentage points to headline inflation, and it predicts that that may “fade” later next year.

Others, of course, disagree. But the truth of the matter is this: with the world never before so interconnected, there are no models and no real history to guide analysts and economists.

Labor Concerns
Another murky area that the Fed must weigh is the health of the nation’s labor force.

While the worry is that AI is already imperiling jobs, the economy remains resilient.

On that score, the Fed’s most recent projection for 2025’s real (less inflation) GDP growth is 1.6%. That’s not great, but the trajectory is positive: it has raised its projections for 2026 and 2027 to 1.8% and 1.9%, respectively. If that occurs, it could help the nation’s employment picture.

Although October data is lacking, the St. Louis Fed indicates that the Labor Force Participation Rate is largely unchanged since the start of the year at 62.4%. So is the nation’s official unemployment rate, slowly ticking higher to 4.4%, up from 4.0% in January. However, unemployment was a full percentage point lower a year ago.

So, based on these economic metrics (which are arguably the two most important of the many the Fed considers), it has plenty of cover to cut rates this month as full employment is one of its two mission goals (the other, of course, is inflation). On the other hand, without any notable success being made on the latter front, another cut in 2026 may not be prudent.

Market Outlook
As for the stock market, there are countless investors who justify the Nasdaq Composite’s extraordinary performance based largely on the infinite promises of AI.

At the same time, the more tried-and-true metric of forecasted earnings growth has benefited other areas of the market, but the promise of additional interest-rate cuts have figured far more prominently in analysts’ price forecasts. Indeed, nearly every time the market seizes on something that increases the odds of a cut, small-cap stocks take flight.

But once the market gets past this and turns the page on 2025, investors’ attention will appropriately shift back to earnings. While AI-related stocks may be a separate matter (owing to their lofty valuations), more accommodative interest rates, comparatively low unemployment, decent economic growth and waning concerns over tariffs could provide a favorable backdrop for stocks next year.

Of course, nothing is assured. Apart from the fact that none of the aforementioned economic data is exceptionally strong, several areas of the stock market are already priced for perfection. As such, brace one’s self for higher volatility.

— John Bonnanzio