All eyes will be on the US Federal Reserve’s FOMC meeting this week. The two-day Federal Open Market Committee (FOMC) meeting held on December 9-10 will set the tone for the markets in 2026.
The Federal Open Market Committee is anticipated to cut interest rates for the third consecutive time during its final meeting of the year on Wednesday. 30-day fed-funds futures indicate an approximately 87% probability of a 25-basis-point rate cut, as per the CME FedWatch Tool.
Rate Cut Expectations
Nomura expects that the US Fed will implement a 25-basis-point interest rate cut during this week’s policy meeting, aligning with other global central banks that have shifted away from previous expectations of maintaining rates. In 2026, Nomura continues to expect the US Fed to cut rates by 25 bps each in June and September under a new Fed chair.
Global brokerages like J.P. Morgan and Morgan Stanley have changed their predictions before the policy meeting, now anticipating a reduction in borrowing costs instead of maintaining them as previously expected.
If the Fed cuts rates by 25bps in December, the federal funds rate will stand at 3.5% to 3.75% level.
Powell’s Press Conference
However, two other things will stand out — Powell’s press conference and the dot plot, as the meeting is associated with a Summary of Economic Projections.
Fed Chair Jerome Powell will hold a post-meeting press conference to talk about the economy, job market, and inflation, offering insights into the Fed’s approach to interest rates for the next meeting in late January.
Inflation is still not under 2%, the level that gives more comfort to the US Fed. Therefore, Powell’s commentary will be crucial to peek into the minds of the Fed members.
Fed officials are facing challenges in making rate decisions due to delayed economic data from the government shutdown. The October CPI data will not be published, and there is no recent jobs report. Concerns about the labor market may lead the central bank to further cut interest rates.
Powell will retire as the Fed chair in May 2026, but his term as a member of the Fed’s board of governors expires in 2028. Kevin Hassett has emerged as the front-runner to replace Federal Reserve Chair Jerome Powell when his term ends in May.
Santa Claus Rally
Will there be a Santa Claus rally in 2025? A lot will depend on how Powell and team are addressing the issue of inflation and jobs in the December FOMC meeting.
Currently, Nasdaq and S&P 500 are cautiously perched at near record high levels and any signal for aggressive rate cuts ahead is expected to boost market sentiment. If Powell signals a tighter regime ahead, there could be a slip-up in the valuations.
December is historically a strong month for stocks, often referred to as the Santa Claus rally. However, the upcoming Federal Reserve policy meeting on December 9-10 may significantly influence whether investors can expect further stock gains or disappointing outcomes, as the Committee will decide on changes to the benchmark interest rate.