FOMC Preview: Navigating the Fed's Final 2025 Decision

The Federal Reserve concludes 2025 with its December FOMC meeting, and consensus expects a 25 basis point rate cut to 3.50%-3.75%. However, the real story lies in what comes next.

The Committee Divide

Chair Powell faces internal resistance, with five of twelve voting members publicly questioning additional easing, while only three Board members support continued cuts. This split creates uncertainty around the 2026 policy trajectory and puts significant weight on Powell's post-meeting commentary.

What the Market Is Pricing

Current futures markets assign just a 23% probability to a January rate cut. The updated dot plot will likely signal two cuts in 2026, with the terminal rate settling around 3.0%-3.25%. Any hawkish surprise in the projections could trigger near-term volatility, particularly if dissenting dots suggest a longer pause than anticipated.

Investment Implications

With the S&P 500 hovering 1.2% below its October highs, positioning matters. If Powell signals a prolonged pause, expect defensive sectors and financials to outperform as the higher-for-longer narrative strengthens. Small caps could benefit from any dovish pivot, given their sensitivity to financing costs.

The key risk is disappointment. Markets have priced in modest easing, so a hawkish shift in forward guidance could pressure risk assets heading into year-end.

Our Take

Focus remains on quality fundamentals rather than timing the Fed. In an environment of diminished easing expectations and persistent inflation concerns, selective positioning in companies with strong balance sheets and pricing power offers better risk-adjusted returns than broad market bets.

Rate decision at 2:00 PM ET, Powell presser at 2:30 PM ET.

Why Gold Remains One of Our Highest Conviction Allocations Going Into 2026

Over the past two weeks, the gold market has been driven less by emotion and more by a decisive shift in global macro structure. Gold’s recent consolidation in the USD 4,000, 4,200/oz band is masking the strength of underlying flows, and in our view, setting the stage for the next leg higher.

1. Policy Regimes Are Turning in Gold’s Favour

The Federal Reserve’s communication pivot has been the single most important development. Markets now price a December rate cut with ~85% probability, followed by another cut in early 2026, as labour market cooling and softer retail and producer inflation prints reduce the Fed’s tolerance for restrictive real rates. Each dovish signal this month triggered immediate institutional buying in gold futures and ETFs.

Parallelly, the RBI is expected to cut rates to 5.25%, supported by a collapse in India’s CPI to 0.25%, the lowest on record. A weaker INR, near all time lows, reinforces gold demand as a currency hedge.

2. Physical Demand Is Surging in Key Hubs

India’s October and November buying pattern was unusually strong despite record rupee prices.

• October imports hit ~140 tonnes, one of the highest monthly tallies in a decade.

• Indian gold ETFs saw ₹77 billion inflows in October, pushing total holdings above 83.5 tonnes, the highest on record.

China’s demand has remained firm but more measured:

• October SGE withdrawals were above normal seasonal levels,

• ETF holdings saw steady inflows, and

• The PBoC continued adding modestly to reserves.

3. Investment Flows Tell the Real Story

Global gold ETFs have added substantial tonnage in 2025, tightening free float supply and reinforcing the market’s structural strength. Central bank demand has remained consistently elevated, providing a reliable bid on corrections and supporting price resilience above USD 4,000.

4. Our Forward View

We expect gold to remain supported as:

• Real yields continue grinding lower,

• The USD weakens into a global cutting cycle,

• Fiscal deterioration in major economies raises debasement hedging demand, and

• EM central banks keep diversifying away from dollar assets.

Our base case forecast for 2026 remains USD 4,500, 5,000/oz, with upside risk skewed toward new nominal highs if global easing accelerates or geopolitical risk rises.

Our Strategy

At Ethereal Capital, we maintain a core long allocation, with tactical overlays that accumulate on liquidity driven dips, especially during oversold periods where ETF flows stay positive and central bank purchases remain uninterrupted. 

Gold, to us, is not a momentum chase, it is a structural allocation in a world increasingly defined by policy volatility, currency fragility, and sovereign balance sheet stress.