Sharing her reaction to last week’s Fed interest rate cut as well as reflections on significant economic data coming down the lines later this week, Capital.com’s Daniela Hathorn comments:
“The Fed’s latest 25-basis-point rate cut landed broadly in line with expectations, but the market reaction has been anything but simple. The nuance lay in the vote split and the messaging: two FOMC members preferred to keep rates on hold, one pushed for a larger 50-basis-point cut, and the rest backed the consensus move. With fewer “no cut” dissenters than expected, markets initially read the outcome as mildly more dovish, sending yields and the dollar lower while equities and gold moved higher. That first reaction was quickly complicated by Jerome Powell’s repeated comment that rates are now “very near neutral,” which many took as a signal that the cutting cycle may be nearing its end, perhaps with only one more move in early 2026. This sits uneasily with market pricing, which still implies more than one cut next year and a year-end policy rate near 3%. The Fed looks increasingly focused on softening labour conditions rather than inflation, but remains reluctant to commit to anything beyond gradual, data-dependent easing.
“The Fed’s projections reinforce this delicate balance. For next year, the Summary of Economic Projections points to stronger growth, broadly steady unemployment and lower inflation, effectively leaning on an AI-driven productivity boost to allow the economy to “run hot” without reigniting price pressures. Equity markets are reflecting this tension: the S&P 500 is range-bound, the NASDAQ has failed to break to new highs, while the Dow and small caps have benefited from rotation into cyclical and value sectors. Investors remain cautious about stretched AI and mega-cap tech valuations and are broadening exposure ahead of 2026, with the key question now whether upcoming earnings – and real-world AI adoption – can validate current pricing. If productivity gains arrive later or weaker than hoped, both policy expectations and equity valuations are likely to face a reckoning.
“Meanwhile, the economic calendar will keep us busy this week. On the US side, this is the first month back to normal data publication after the government data shutdown. The schedule includes PMIs, US CPI and jobs data for November, and PCE inflation for October, which remains slightly delayed. The labour market numbers will be watched especially closely, given the Fed’s clear shift in emphasis toward the employment side of its mandate. A softer labour market and tame inflation could encourage markets to bring forward expectations for the next rate cut, currently seen after holds in January and March with April as the next “live” meeting, support hopes for a “Santa rally” in equities, add further pressure on the US dollar, and reinforce the bullish narrative for gold, which is already trading near record highs.
“On the inflation side, the dynamic between CPI and PCE will also matter. The latest data showed PCE at 2.8% and CPI at 3% on the last available readings. A move in CPI below 3% combined with stable PCE would likely be taken as confirmation that the disinflation process is back on track – another tailwind for risk assets.”
