December 12, 2025
The Federal Reserve cut rates by 0.25% at this week’s FOMC meeting to 3.5-3.75% which is the third consecutive rate cut of that magnitude since September. The Fed has signaled an easing move of roughly this magnitude since June so this action was widely expected. But now the going gets tough. The Fed anticipates one more 0.25% cut in the funds rate in 2026. To make that happen it needs to see some evidence of either deterioration in the labor market (which it does not expect), or a slower rate of inflation (which it does anticipate). It expects the core personal consumption expenditures deflator to slow from 3.0% in 2025 to 2.5% by the end of next year. That seems to be key. Any rate cut is unlikely to occur until spring. A lot can happen in the meantime. Data that become available between now and the end of the year could easily alter the anticipated scenario.
Many economic statistics were significantly delayed by the six-week government shutdown in October and the first half of November. Many of the delayed data will be released between now and Christmas.
First up, on Tuesday, December 16 will be employment data for both October and November. Digesting even a single month’s employment report is challenging. Getting two months of data simultaneously is both unprecedented and a potential game changer. In addition to the payroll employment statistics we will get the unemployment rate, hours worked, and hourly earnings all of which are crucial. Keep in mind that these data are for the period of time when the government was shut down. For what it is worth, an employment gain of about 50 thousand is expected for October and 25 thousand for November. The unemployment rate is likely to edge up from 4.4% currently to 4.5%.
That same morning will get retail sales data for October. A small increase of 0.2% is expected. The November sales data will be further delayed until mid-January. Once again, keep in mind that the October data will reflect sales that occurred while the federal government was shut down.
Two days later on Thursday, December 18 the CPI report for November will be released The October report was canceled because of the shutdown. Rather than try to re-create and backdate the October survey, the BLS will incorporate some October data into the November report we will see next week. With any potential Fed rate cuts next year seemingly dependent upon a slowdown in inflation, the October and November data are clearly important. The market expects an overall increase of 0.3% in November and a 0.2% increase in the core rate of inflation.
Of all the data released between now and Christmas the third quarter GDP report is arguably the most critical. It will be released on Tuesday, December 23 — a Christmas present for all of us! It is hard to know where you are going if you don’t know where you’ve been. The GDP report was initially scheduled to be released in late October but has been delayed for almost two months by the government shutdown. Estimates vary widely, but the consensus appears to be for growth of around 3.0%. A surprise – in either direction – would alter economists expectation of GDP growth in the fourth quarter.
What does the Fed expect GDP growth to be in the third and fourth quarters? We don’t know exactly but we can guess. At the meeting this past week the Fed’s Summary of Economic Projections indicated that it expected GDP growth of 1.7% for the year. Working backwards, we know that GDP declined 0.6% in the first quarter and then rebounded by 3.8% in the second quarter. Doing the math implies that the Fed expects growth in the final two quarters of the year to total 3.6%, but we do not know how that is split between the two quarters. If the Fed, like most economists. anticipates 3.0% growth in the third quarter, than it must be anticipating a sharp growth slowdown to 0.6% in the fourth quarter — probably reflecting the drop-off in economic activity caused by the government shutdown. The payroll employment and retail sales reports released next week should help economists decipher whether such a dramatic growth slowdown is underway.
To complicate the situation even more, the composition of the Fed’s decision-making FOMC committee will change at the January 27-28 meeting. The FOMC consists of the seven members of the Federal Reserve’s Board of Governors, the president of the New York Fed, and four other Federal Reserve bank presidents who rotate annually. Two of the presidents who will be rotating off the FOMC next year are President Jeffrey Schmid from Kansas City and Austan Goolsbee from Chicago. These two individuals were dissenters at one or both of the FOMC meetings in October and December and preferred no change in rates rather than the 0.25% rate cut that was adopted. They presidents of the Cleveland, Richmond, Atlanta, and Minneapolis Fed’s who will become voting members in 2026 all voted with the majority for 0.25% rate cuts at each of those two meetings.
The final thing worth noting is that the Fed believes that a neutral level for the federal funds rate is 3.0% but 9 of the 17 FOMC members believe that rate is somewhere between 3.25% and 4.0%. The target range currently is 3.5-3.75%. The point is that almost all FOMC members believe the funds rate is now at or very close to a neutral rate. The Fed will need convincing evidence that the economy is slowing down, and/or the inflation rate is once again trending downward to justify additional cuts. The data released between now and Christmas will give us a hint if that is happening.
Stephen Slifer
NumberNomics
Charleston, S.C.
Follow Me