As widely expected, the Federal Open Market Committee (“FOMC”) announced that it lowered the fed funds target rate by 25 basis points to 3.50% to 3.75% following their December meeting. Joining Stephen Miran and Jeffrey Schmid in dissent this month was Austan Goolsbee, with Miran voting for a 50-basis point cut for the third straight meeting while Schmid and Goolsbee voted to maintain rates at their current level. In addition, the Fed wasted little time shifting from quantitative tightening to quantitative easing, announcing that as of December 12, it will buy $40 billion of T-bills a month to maintain reserves.
With data coming in late and potentially skewed on the back of the government shutdown, it was unsurprising that the Fed’s statement provided for additional latitude as the calendar turns to 2026, stating that as it relates to further rate cuts, “the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks.” However, the quarterly update of economic projections pointed to an increase in growth expectations for 2026, from +1.8% to +2.3%, with unemployment expected at 4.4% and core PCE for 2026 to come in at +2.5% versus +2.6% in September’s estimate.
What was clear from the press conference is that the Fed is at an inflection point. While the risk management portion of the current rate cutting cycle is likely ending – we project one more interest rate cut in the first quarter of 2026 – there is meaningful dispersion on the Committee as to the best next step. Should the labor market continue to soften, the Fed could choose to become more accommodative, but stronger growth, even against a backdrop of cooler inflation, could be a hurdle for some members of the FOMC. Admittedly, with Fed Chair Jerome Powell expected to be replaced when his term ends in May 2026, there could be a more dovish tilt to the Fed in the back half of the new year – perhaps regardless of the state of the dual mandate.
In short, while the Fed’s path is uncertain, it’s leaning toward easing as inflation moderates, which should help growth and risk assets. We remain constructive on equities, favoring cyclicals and quality growth. We also believe there will be continued broadening in equity performance and suggest looking outside of U.S. large cap to small cap and ex-U.S. exposures for 2026. In fixed income, we recommend moving out of cash and ultra-short bonds, extending duration, and adding credit as appropriate. Finally, within private markets, we favor strategies providing liquidity such as secondaries and co-investments ahead of normalizing distributions and a potential uptick in M&A in the back half of 2026.
