The Federal Reserve's final meeting of 2025 begins Tuesday, with the rate decision announcement on Wednesday at 2 PM Eastern. Markets are pricing in an 85% probability of a 0.25 percentage point cut—but the decision itself may matter less than what the Fed signals about 2026.

Here's what you need to know and how to think about your portfolio heading into Fed week.

The Decision Framework

The Fed is weighing competing forces:

Arguments for cutting:

  • The labor market has softened (unemployment at 4.4%, hiring slowed dramatically)
  • Core inflation has moderated to 2.8%, getting closer to the 2% target
  • Consumer sentiment remains fragile after shutdown disruption
  • Fed officials Waller and Williams have signaled support for easing

Arguments against cutting:

  • Inflation remains above target (2.8% vs. 2.0% goal)
  • Tariffs are adding inflationary pressure
  • Stock markets at record highs don't suggest economic distress
  • Some Fed officials have expressed caution about cutting too fast

The consensus expects a cut, but it's one of the more divisive Fed decisions in recent memory.

Why the 2026 Projections Matter More

Wednesday's announcement includes updated economic projections—the famous "dot plot" showing where Fed officials expect rates to go. This forward guidance often moves markets more than the immediate decision.

Key questions:

  • How many cuts do officials project for 2026?
  • Has the "neutral rate" estimate changed?
  • Do projections reflect tariff-related inflation concerns?

If the dot plot shows fewer 2026 cuts than markets expect, stocks and bonds could sell off even with a December cut. Conversely, a dovish surprise could fuel a year-end rally.

Scenario Planning

Scenario 1: Cut + Dovish guidance

The Fed cuts 25 basis points and signals multiple cuts in 2026. This is the bull case—stocks rally, bonds rally, risk appetite increases.

Scenario 2: Cut + Hawkish guidance

The Fed cuts but projects fewer 2026 cuts than expected. This "hawkish cut" could disappoint markets. Short-term positive, longer-term caution.

Scenario 3: No cut + Pause signal

The Fed holds and suggests an extended pause. This would surprise markets and likely cause stocks to pull back. Low probability but not zero.

How to Position Your Portfolio

For most investors: Don't change anything

Here's the uncomfortable truth: trying to trade around Fed decisions is usually a losing game. Markets have already priced in expectations. The decision comes down to subtle differences in language that are impossible to predict.

If you have a long-term investment plan, stick to it. Fed meetings come and go; your financial goals remain constant.

For active investors: Consider these angles

If you insist on tactical positioning:

Rate-sensitive stocks: Utilities, REITs, and dividend payers tend to benefit from rate cuts. Small caps, which rely more on borrowing, also typically respond positively.

Growth vs. value: Rate cuts favor growth stocks (higher valuations become easier to justify). Value stocks may underperform relatively.

Bond duration: Longer-duration bonds benefit more from rate cuts. If you expect a dovish surprise, extending duration makes sense. If you're concerned about inflation, stay shorter.

Sector rotation: Financials can actually struggle with rate cuts (compressed net interest margins). Defensive sectors may lag if risk appetite increases.

What History Tells Us

Looking at market reactions to Fed decisions:

  • The initial reaction is often reversed within 24-48 hours
  • The direction of the next week's moves rarely matches the first hour's reaction
  • Volatility around decisions creates more noise than signal

In other words, if you weren't positioned before the meeting, chasing the immediate reaction usually doesn't work.

The 2026 Outlook

Regardless of Wednesday's decision, the broader rate trajectory seems clear: rates are heading lower, but slowly. The days of near-zero rates are over for the foreseeable future.

What this means for your portfolio:

  • Cash still earns something: Money market rates above 4% remain attractive for emergency funds and short-term savings
  • Bonds are viable again: After a brutal 2022, bonds once again provide meaningful income and diversification
  • Valuation matters more: With a higher rate floor, overpaying for stocks has higher consequences

The Bottom Line

Fed week generates outsized attention relative to its actual importance for most investors. Yes, the decision matters for markets in the short term. But your long-term financial success depends far more on your savings rate, asset allocation, and behavior than on whether the Fed cuts by 25 basis points on a particular Wednesday.

Watch the decision if you find it interesting. Read the analysis if you want to understand the economy. But don't make portfolio changes based on predictions about language in the Fed statement.

The best Fed week strategy is the same as every other week: stick to your plan, stay diversified, and focus on what you can control.