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.