📉 1. Fed Already Began Cutting in 2025
The Fed has cut the federal funds rate by 25 basis points at its December 2025 meeting, bringing the target to 3.50 – 3.75%. This was the third consecutive reduction aimed at easing financial conditions.
Federal Reserve
Markets broadly priced in that cut ahead of the announcement, reflecting investors’ belief that the Fed was ready to pivot from tightening.
Fidelity
📊 2. Shifting Expectations for 2026
Investors are now re-calibrating how many cuts to expect next year. While previously more aggressive easing was priced in, forecasts now suggest fewer or more gradual cuts in 2026 as economic data evolves.
Morningstar
Recent economic strength (e.g., stronger-than-expected GDP growth) is leading markets to believe the Fed might hold rates steady longer or slow the pace of future cuts.
Reuters
🔄 3. Why Expectations Are Changing
A. Stronger Economic Data
Robust U.S. GDP and resilient output have tempered expectations of aggressive easing, as policymakers may be less inclined to cut if inflation remains above target and growth persists.
B. Labor Market Dynamics
Reuters
While job growth has softened slightly, unemployment remains moderate. Markets now expect the Fed to balance inflation, employment, and growth data rather than rush into cuts.
C. Forward Guidance & Uncertainty
Fidelity
The December Fed statement sounded more cautious about the timing and extent of future cuts, indicating that additional rate moves depend heavily on incoming data. This has made markets less certain about early-year cuts.
Nuveen
📈 4. Market Indicators Reflect Changing Views
Bond yields and futures markets have shifted: the pricing of Fed funds futures now reflects a lower probability of multiple cuts early in 2026 than before.
Morningstar
The yield curve dynamics (with short- and long-term yields reacting to expectations of monetary policy shifts) are also being watched as investors try to gauge recession odds vs. ease.