Fed’s Hawkish Tone Leaves Markets Searching for Direction as 2026 Rate Cuts Look Limited
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The Federal Reserve’s latest meeting may have come and gone earlier this week, but the aftershocks are still rippling through global markets this Saturday.
Chair Jerome Powell’s comments on Wednesday — signaling only two or three rate cuts in 2026 rather than the four some investors had priced in — caught many off guard. While the central bank delivered the expected 25-basis-point cut in December, bringing the federal funds rate to 4.25%-4.5%, the updated dot plot painted a more cautious picture for next year.
“The economy is strong, inflation is moderating but still above target, and the labor market remains resilient,” Powell said in his press conference. “We’re in no rush to ease further.”
Treasury yields jumped in response, with the 10-year note climbing back above 4.4% on Friday. Equities have been mixed: the S&P 500 is down about 0.8% for the week, while the Nasdaq has held up better thanks to continued strength in Big Tech.
Analysts say the shift in expectations reflects a growing confidence in the U.S. economy’s ability to avoid a hard landing. “The Fed is essentially saying ‘job well done so far, but let’s not declare victory too soon,'” said Kristina Hooper, chief global market strategist at Invesco.
For investors, the message is clear: lower-for-longer might not return anytime soon. Bond traders are now pricing in just 50 basis points of cuts through 2026, down from nearly 100 a month ago.
Small-cap stocks and rate-sensitive sectors like real estate have felt the pinch most acutely, while financials have benefited from the steeper yield curve. Bank of America and JPMorgan shares are both up over 2% this week.
As markets head into the holiday-thinned trading period, many are bracing for continued volatility. “Year-end positioning could exaggerate moves,” warned one fixed-income strategist at Goldman Sachs.
With inflation still sticky in services and shelter costs, the Fed’s data-dependent approach means every upcoming report — from CPI to jobs data — will be scrutinized even more closely in the new year.
