The Federal Reserve delivered its third interest rate cut of 2025 this week, lowering the federal funds rate by a quarter point to a range of 3.5%-3.75%. But the real story wasn't the cut itself—it was what Fed Chair Jerome Powell said afterward.
"We're well positioned to wait and see how the economy performs," Powell told reporters. Translation: don't expect another cut in January, and possibly not for several months thereafter.
This "hawkish cut"—lowering rates while simultaneously dampening expectations for future easing—has forced investors to recalibrate their 2026 playbooks.
The New Rate Outlook
The Fed's updated "dot plot" projections tell the story. In September, officials had projected four rate cuts in 2025 and additional cuts in 2026. Now the picture looks very different:
- 2025: Three cuts completed (mission accomplished)
- 2026: Only two additional cuts projected
- 2027: One more cut expected
- Terminal rate: Around 3.0%, higher than previously expected
Markets are now pricing in no rate cut until at least June 2026. The era of aggressive easing that began in September 2025 may already be over.
Why the Fed Is Pumping the Brakes
Several factors are driving the Fed's more cautious stance:
Sticky inflation: While inflation has declined significantly from its 2022-2023 peaks, it remains above the Fed's 2% target. Powell acknowledged that further progress toward that goal has been slower than expected.
Resilient economy: The U.S. economy continues to grow above trend, with strong consumer spending and a labor market that, while cooling, remains healthy. There's less urgency to stimulate growth when growth is already solid.
Policy uncertainty: With a new administration taking office and potential fiscal policy changes on the horizon, the Fed may be waiting to see how government spending and tax policy evolve before committing to further rate cuts.
The Dissent Problem
Three Fed officials voted against the December cut—the most dissent at a policy meeting since 2019. This internal disagreement suggests that even the current rate level may be more accommodative than some policymakers prefer.
Chicago Fed President Austan Goolsbee, one of the dissenters, later explained his thinking: "I've just been uncomfortable front-loading too many rate cuts." He believes rates will ultimately be "a fair bit lower" in 2026 but wants to see more data before easing further.
What This Means for Your Portfolio
The shift toward fewer rate cuts has significant implications for different asset classes:
Stocks
Higher-for-longer rates are a headwind for growth stocks, whose future earnings are worth less when discount rates are elevated. The rotation from growth to value that accelerated this week may continue if rate expectations remain anchored at current levels.
Bonds
Bond investors should expect yields to remain elevated. The 10-year Treasury yield, currently around 4.4%, may not fall much further if the Fed maintains its cautious stance. That's good news for savers seeking income but challenging for those hoping for capital appreciation from falling rates.
Real Estate
Mortgage rates, which briefly fell below 6.6% this week, may not decline much further in the near term. Prospective homebuyers hoping for sub-6% mortgages may need to wait longer than expected.
Cash
High-yield savings accounts and money market funds should continue offering attractive yields well into 2026. Savers have less pressure to move out of cash into riskier assets.
Powell's Final Months
Adding complexity to the outlook: Jerome Powell's term as Fed Chair expires in May 2026. President Trump is expected to announce his choice for a successor—widely believed to be White House advisor Kevin Hassett—around Christmas.
This creates a "tale of two halves" scenario for 2026, as one analyst put it. Powell's cautious approach will guide policy through his final meetings in January, March, and April. After that, a Trump-appointed chair could usher in a very different policy framework—potentially one more amenable to rate cuts.
How to Position
Given the uncertainty, investors should consider:
- Maintain diversification: Don't bet entirely on the rate-sensitive trade in either direction
- Consider value: If rates stay elevated, value stocks with strong cash flows may outperform
- Lock in yields: Current bond yields are historically attractive—consider extending duration modestly
- Stay flexible: Policy could shift dramatically after Powell's departure
The Fed has made its near-term intentions clear. Whether that stance holds through the political and economic uncertainty of 2026 remains to be seen.
