Responding to the Fed decision, John Wyn-Evans, Head of Market Analysis at Rathbones, said: “One of the few remaining uncertainties for investors to negotiate before the end of the year was the final Federal Reserve FOMC meeting of 2025. Although, after much indecision, market expectations were pitched at a 90% probability of a cut, voting members were still going to have tread carefully between concerns about a slowing labour market on the one side and persistently above-target inflation on the other.
“In the event, they voted to cut rates by 0.25% to a range of 3.5% to 3.75%. But there was dissent in the ranks, with one member (temporary Trump appointee, Stephen Miran – and so no surprise) voting for half a percent and two for no change. That slightly hawkish tilt was reflected in forward guidance and a ‘dot plot’ of future rate expectations (including views from non-voting members) which suggests only one further cut in 2026, even though market pricing is for two. More positively, the Fed’s own core inflation expectations saw a reduced forecast of 2.5% (from 2.7%) for 2026.
“There was also an announcement that it will purchase, initially, $40bn of US Treasury Bills per month to reduce liquidity constraints in overnight money markets. This is a sensible and welcome reserve market stabilisation policy and, while it will involves a renewed expansion of the Fed’s balance sheet, should not be confused with Quantitative Easing.
“The market reaction was positive, with 2-year yields falling by 8bps and the S&P 500 rising by 0.67% to close within 0.06% of its all-time high. It is quite rare for the Fed to be cutting rates with equity indices trading at peak levels, but, historically, it has tended to be a positive factor for returns over the next twelve months.
“There are two more important central banks meetings to get past before the year end. The Bank of Japan meets at the end of next week and expectations are for a 0.25% increase (89% probability). The BoJ, contrary to other G7 central banks, is tightening policy as its economy is finally generating inflation. The pace and scale of tightening is important owing to the use of the yen as a funding currency for ‘carry trades’ in other markets and so the messaging about future policy will be very important, especially in light of the more expansive fiscal agenda of the new Prime Minister. The Bank of England also delivers its rate decision next Thursday, with high market expectations (92% probability) for a quarter-point cut to 3.75%.
“Even so, investors quickly returned to business-as-usual overnight, and a disappointing earnings report from Oracle, now one of the bellwethers for the generative AI trade, has taken the shine off equity markets overnight. Oracle’s shares fell 9% in after-hours trading. The pace of investment in AI and the ability to generative sufficiently attractive returns from that expenditure will continue to be a key driver of market performance as we move into the new year, much as it was this year.”
