Fed Watch – 12/12/2025

The below transcript is a literal translation of the podcast audio that has been machine generated by Notta.

Hi, I’m Lauren Saidel-Baker and thank you so much for joining me for this December 12th edition of Fed Watch. Well, we got our interest rate cut this week. The Federal Reserve did in fact cut on Wednesday by 25 basis points. But behind the scenes, this was not a unanimous decision. For I believe the fourth meeting in a row, we had some dissent amongst the ranks, and this time both to the upside and to the downside. So on the one hand, two members of the voting committee voted for no change to interest rates. And on the other hand, as has become typical, Miran voted for a full 50 basis point cut, whereas the committee only cut by 25.

So as we drill into what this really means, it’s less about this individual cut and more about the path of rates going forward. We’re seeing less and less signal that we will maintain this ongoing rate cut cycle into 2026. The dot plot, which is our easiest way to view Fed intentions, showed actually seven members who do not see any further rate cuts coming by the end of 2026. Now, very interestingly, that was divided between four dots that are just staying at the current level of interest rates through year end next year. But there were also three dots that are placed 25 basis points higher. So could we start to see rate hikes re-enter the discussion? That is very possible. Now, on the other side, we had a kind of trickling down the interest rate cycle all the way down to one dot, again, very commonly assumed to be Miran, that shows the equivalent of six quarter point cuts coming next year.

So is reality somewhere in that very, very wide, very elongated range? That is likely. But it’s also important to note that at this point, we’re not seeing the full impact of these interest rate cuts really flow through to things like actual borrowing cost. That’s true both on the consumer side, Powell answered several questions during his press conference about affordability, specifically housing affordability, but it’s also true on the business side. It’s also true for something like our government bond yields. So we’re definitely seeing a different tack coming from the bond market, their views of inflation and of potentially growth going forward.

Now, with regard to inflation, during the press conference again, Powell got some questions on that and specifically on the tariff impact to inflation. He said that their base case expectation is that if we get no new tariffs, the peak inflation rate will hit in the first quarter of 2026. I really want to juxtapose that expectation against what we think here at ITR Economics, which is that, first of all, it is not only tariffs that is affecting these higher price levels. There are a number of much more fundamental factors, things that are very hard to turn on and off, like tariffs, that are coming through that will be impacting final pricing going forward. So our expectation is that inflation, at least as measured by the Consumer Price Index, that should peak in either late 2026 or early 2027. So up to a full year later, and I am expecting at a higher level than the Fed is using as their base case.

As always, we’ll be watching this going forward. And just this past week, Brian Beaulieu, our chief economist and I, hosted a special webinar really drilling down into interest rates into interest rate sensitivity and what that means through the remainder of this decade leading up into the depression event that we see coming in 2030. So we’re going to link to that webinar in the notes below. If you’re interested, please click through. There’s a lot of really compelling information there. But otherwise, thank you so much for joining us today. And we’ll see you in the future right here on Fed Watch.