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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
What the Federal Reserve does is often less important than what it signals. And the less it signals, the more uncertainty is in store for investors. This week, expect a quarter-point rate cut and a lot of ambiguity over what happens next.
For one thing, the Fed, like the markets, is flying half-blind. Government agencies are still playing catch-up after Washington’s record 43-day shutdown ended last month. Jobs data and retail sales numbers for October and November have yet to be released. Wednesday’s quarterly update on Fed committee members’ forecasts for rates and inflation may therefore be overtaken when those figures are eventually published next week. Companies and investors making their own 2026 forecasts will need to employ more guesswork than usual.
There’s also the waning power of Fed chair Jay Powell to factor in. He steps aside in May, and there is a high likelihood that President Donald Trump, who has repeatedly said he wants lower interest rates, will appoint someone he thinks very likely to deliver just that. Interest rate futures aren’t pricing in another cut, following this week’s expected move, until June, suggesting they think there will be no more action during the Powell era.
If the Fed is hard to read, could bond markets give clearer cues? Not at present. The standard benchmarks that set the cost of loans for much of corporate America are rising, when normally, if the Fed were inclined to lower rates, they would be expected to fall. Since late October, 10-year yields have risen 0.21 percentage points. The 30-year yield is 0.25 percentage points higher.
Those rising bond yields could mean different things. One is that investors are worried about debt-fuelled government spending and think bondholders will demand more for the risk of holding US debt. A more near-term risk is that the Fed is forced to raise rates again because inflation stubbornly refuses to fall to a palatable level.
Another argument posits that yields are, in fact, signalling confidence in the US economy. This would involve fewer rate cuts because everything is chugging along just fine, in a situation that is more similar to the 1990s than anything since. In support of that thesis, strategists are at present predicting that 2026 will mark the fourth consecutive year of gains for the S&P 500, the first time such a run has occurred in more than two decades. That would be one less thing for investors to worry about.
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