The last meeting of the Federal Reserve (Fed) has given a lot to talk about. The US central bank cut interest rates by 25 basis points (bp), as expected, and kept its forecast of declines for next year unchanged. It also announced the resumption of its bond purchase program, but with a clear focus on the short term. Meanwhile, the president Jerome Powell was more ‘dovish’ than expected in their subsequent press conference, taking an optimistic stance on the trajectory of inflation – if tariffs are excluded, it could peak in the first quarter of 2026 – but more negative on a weaker labor market than they would like to see. In fact, Powell himself admitted that official data could be overstating job creation by 60,000 jobs per month. In other words, the United States could be destroying about 20,000 jobs every month. «I believe that a world where job creation is negative… we need to look at that very carefully«said the president of the central bank. Precisely, the divergence between the path of inflation and the labor market is what has contributed to the fracture of the Fed. The problem, as Powell says, is that «There is no risk-free path» nor can they leave one of the two objectives of their dual mandate—price stability and maximum employment—unattended. «We have long highlighted these tensions in a new environment marked by megaforces (major structural trends) and supply constraints. Powell’s comments also reinforce that many of the structural forces facing the economy — such as lower labor supply — are something that monetary policy cannot address«says Jean Boivin, head of the BlackRock Investment Institute. According to Powell, «when both sides of the mandate are threatened, you must remain more or less neutral»as is the case. For the president of the central bank, the current position is «at the high end» of rate neutrality, a circumstance that will allow them to «wait and see» how data evolves that will be key for the January meeting… and to know if the decision to cut was the correct one. Although some experts believe they already know the answer.
HAS THE FED BEEN WRONG?
Dennis Shen, economist and president of the Scope Ratings Macroeconomic Council, is clear that the Fed has slipped in this meeting. According to the German firm’s expert, The decision is «wrong» and «very controversial»due to both political and market pressure. On the one hand, Shen points out the obvious division within the central bank. For the first time in 2019, three members of the Federal Open Market Committee (FOMC) voted against the majority, with two in favor of keeping rates at their current levels and one, Stephen Miran, the governor appointed by Donald Trump, advocating a further drop, of up to 50 basis points. Future forecasts only highlighted these differences.
The dot plot showed that seven FOMC members do not expect interest rate cuts next year – with three of them defending increases – while four predict one cut, another four believe there will be two more and four more project at least three more cuts in 2026. As if that were not enough, as the document reflects, the differences remain in both 2027 and 2028 and in the long term. Overall, the forecasts are maintained: a 25 bp cut in 2026, compared to the two expected by consensus, and another in 2027. For many analysts, this shows the biggest problem that the Fed has at the moment: the shadow of US President Donald Trump looming over the central bank. Trump has been very critical of Powell, whom he has asked to lower interest rates to 1% and whom he has threatened to fire on more than one occasion. With Powell’s term as president expiring in May 2026, and seeing his actions in appointing Miran, markets expect Trump to appoint a figure similar to his ideas. In this sense, all the focuses point to Kevin Hassettdirector of the National Economic Council and one of the president’s closest advisors, who has already acknowledged to ‘The Wall Street Journal’ that interest rates They can continue to decline further and at a greater rate than the current one.
This scenario deeply worries Shen, who believes that the Fed risks going from the «unifying» Powell to a «polarizing» figure who erode the Fed’s two greatest assets: its independence and its credibility. «The politicization of the Fed and the weakening of the independence of the central bank are reasons of great concern for economic and financial stability«warns the expert from the German rating agency.
CALCULATION ERROR?
But the problem is not just political, since, according to Shen, the gaps in the data known after the closure of the federal government «are still real.» Although he considers it «prudent» that the Fed has suggested a momentary pause – some believe that until it is decided who will replace Powell – the expectation that the new president will push for further interest rate cuts makes the speech «less convincing.» «Federal Reserve members revised up their average growth forecasts for 2026, from 1.8% to 2.3%, which is in line with Scope’s 2.4% forecast. They expect slightly lower inflation, but given the resilience of the US economy, mixed labor market data and above-target inflation, there was no need to lower rates yesterday«, he states. This thesis is shared by Boivin. The BlackRock expert believes that the Fed’s inclination towards new rate cuts in a context of resilient inflation and growth «reveals a disconnect in global monetary policy». Without going any further, this expert recalls that several central banks, especially in Europe and Australia, which are weaker than those in the US, indicate that their next rate move will be upward.
«There was no need to lower interest rates,» says Scope Ratings
«This disconnection and the impact of megaforces increases uncertainty about the Fed’s trajectory, is a risk for next year and puts additional weight on upcoming US data, especially the resumption of employment and inflation reports next week and in January, when the data calendar begins to normalize,» he underlines. Likewise, Boivin warns that any rebound in hiring or business confidence «could reactivate inflationary pressures, reintroducing tensions in monetary policy regarding the sustainability of the federal debt. George Brown, senior economist at Schroders for the United States, takes this same line, the reductions that have been made and that the central bank contemplates «they risk fueling inflation rather than supporting real growth». «We are concerned that the Fed is underestimating the risk of higher inflation and that the market is undervaluing it. We also believe that rates are not as restrictive as many believe, given the resilience of the economy in recent years, despite high nominal rates. Therefore, we continue to believe that the market’s valuation of a terminal rate of less than 3% for the Fed is too aggressive,» says this strategist. For the Schroders expert, The economic situation of the United States is complex. On the one hand, the economy «enjoys a solid foundation» and, although it depends on the dynamics of the labor market, the moderation in hiring is «symptomatic of trade uncertainty and concern about secondary effects on growth.» «As these obstacles disappear, job creation should recover, but immigration restrictions could limit labor supply and push up real wages. Growth should also be supported by more accommodative monetary policy and the positive fiscal impulse of the ‘One Big Beautiful Bill’. Therefore, we forecast that the US economy will grow by 2.4% in both 2026 and 2027,» he explains. On the other hand, these factors make a resurgence of inflation more likely. According to Brown, the impact of tariffs has been «limited» on consumer prices, but he doubts that companies can continue to absorb them, «given their breadth and scale.» In this sense, now that there is «clarity» about «where rates are likely to stabilize,» this analyst expects that Companies begin to shift part of the burden to consumers.
«This could lead to second round effects in price and wage settingespecially in the face of high inflation expectations. «Our forecast is that CPI inflation will be above consensus, at 3.3% in 2026, before falling to 2.3% in 2027,» he says.
HOW TO INVEST?
In this context, Mathieu Racheter, head of equity strategy at Julius Baer, believes that investors would do well to look not only at US stocks.
First, because earnings growth «is expanding beyond the US, and a more accommodative Fed «has historically supported stocks, even at elevated valuations». «This makes international diversification increasingly important as regional earnings momentum improves,» he notes. Additionally, year-end seasonality means the overall outlook toward early 2026 remains “constructive.” The last two weeks of December have historically been the strongest of the year, with average gains of 1.4% and a hit rate of about 75%, according to data from Julius Baer. Secondly, because the volatility seen after disappointing Oracle results once again gives a good account of how the market reacts when companies linked to artificial intelligence (AI) do not convince. The technology company led by Larry Ellison sank this Thursday after disappointing with its income and increase its capital spending forecast to $50 billion in the fiscal year15,000 million more than in its previous forecast. In the last quarter alone, the company spent $12 billion, almost 33% more than analysts expected, and continued to burn cash—its free cash flow stood at -10 billion—and its debt exceeds $100 billion. «Investors They seem to continually expect incremental capital spending to generate additional revenue faster than reality reflects.«, highlights Mark Murphy, analyst at JP Morgan. And when they don’t meet the bar, the market gets scared.
Regarding fixed income, Dario Messi, head of fixed income analysis at Julius Baer, believes that the Treasury bill purchases announced by the Fed will be important to stabilize liquidity and help stabilize the curve. «We will likely see elevated net buying over the next few months, which should eliminate some of the recent volatility in money markets. We expect Treasury yields to remain range-bound and sideways from now on.«he concludes.
