Economic and Market Commentary – December 2025

We opened December 2024’s commentary with the two-word sentence, “Divergent December.” While that description is quite germane in defining December 2025, we deemed that a more fitting characterization would be “Dubious December”, particularly as it pertained to monetary policy forward guidance. Before we discuss the Fed, and the policymakers’ discordant outlooks regarding the direction of monetary policy, it is significant to note that although U.S. equity performance was generally flat for the month, coupled with mixed U.S. fixed income returns, both asset classes finished the year in positive territory, cementing a third consecutive year of double-digit returns for major U.S. equity indices, and a banner year for both investment-grade and high-yield U.S. bond indices.

In Chairman Powell’s press conference after the October Fed gathering, he professed, “A further reduction in the policy rate at the December meeting is not a foregone conclusion.” Well, that declaration of ambiguity transpired into fruition. On December 10, at the conclusion of the Fed’s eighth (final) policy meeting of the calendar year, the FOMC enacted its third 25 basis point rate cut to its overnight benchmark rate in 2025, lowering the federal funds target rate range to 3.50% - 3.75%. While 9 of 12 FOMC voters were in favor of a third 25 basis point abatement, this monetary policy decision saw not one (September), not two (October), but three dissents. Similar to the two prior meetings, Federal Reserve Board Governor Stephen Miran opted for a 50 basis point reduction. Contrarily, regional bank Federal Reserve Presidents Jeffrey Schmid (Kansas City) and Austan Goolsbee (Chicago) voted to leave the range unchanged. This marked the first time since September 2019 that there were three dissenters.

Abiding by quarter-end month’s policy meeting protocol, the Fed released its updated Summary of Economic Projections (SEP), which provided deeper insights into the Committee’s assumptions and forecasted trajectory for the conclusions of 2025 and 2026. Updated from September’s projections for 2025, the change in real GDP was inched up +0.1% to 1.7%, while the unemployment rate was unchanged at 4.5%. Headline PCE inflation and core PCE inflation were both ticked down -0.1% to 2.9% and 3.0%, respectively. Regarding interest rates, the median federal funds rate was set at 3.6% on the backdrop of December’s rate cut, and the longer-run neutral rate was maintained at 3.0%. Probing 2026’s forecasts, the revised projection for the change in real GDP was boosted to 2.3% from 1.8%, while the unemployment rate was unchanged at 4.4%. Headline PCE inflation and core PCE inflation were pared -0.2% and -0.1%, respectively, slated to end the year at 2.4% and 2.5%. The 2026 median federal funds rate is projected to settle at 3.4%, indicating a median forecast of one 25 basis point rate cut, and the longer-run neutral rate was once again maintained at 3.0%.

Dissecting the updated dot plot acutely accentuates the extensive disparities that exist amongst Fed officials. While there were six “soft dissents” in preference to leaving the target range unchanged at December’s meeting, of the 19 policymaking members, 25 basis point rate-move projections for the entire calendar year of 2026 were as follows: One rate hike – three members; No moves – four members; One rate cut – four members; Two rate cuts – four members, Three rate cuts – two members; Four rate cuts – one member; Six rate cuts – one member. Dubious.

U.S. Treasury yield curve steepened distinctly as money market yields experienced double-digit descents on the backdrop of December’s 25 basis point rate cut. Conversely, intermediate and long-dated yields ascended double-digits, with 2yr and 3yr tenor yield moves muted.

2-year/10-year spread: 69 basis points

3-month/10-year spread: 54 basis points

2-year/5-year spread: 25 basis points

3-month/30-year spread: 121 basis points

U.S. Treasury Yield Curve Source: Bloomberg

December 2025 Macroeconomic Highlights

Inflation, Expectations, and Consumer Sentiment¹:

CPI: 2.7% year-over-year (N/A month-over-month); Core CPI: 2.6% year-over-year (N/A month-over-month)

PCE: 2.8% year-over-year (+0.3% month-over-month);Core PCE: 2.8% year-over-year (+0.2% month-over-month)

PPI: 3.0% year-over-year (+0.2% month-over-month); Core PPI: 3.0% year-over-year (0.0% month-over-month) Core PPI less trade services: 3.5% year-over-year (+0.2% month-over-month)

Inflation Expectations: 1-year horizon: 3.2%, 3-year horizon: 3.0%, and 5-year horizon: 3.0%

Consumer Sentiment: 52.9 vs. 51.0 in November 2025; Current Conditions: 50.4 vs. 51.1 in November 2025

Consumer Expectations: 54.6 vs. 51.0 in November 2025

Labor Market²: The U.S. economy added +64,000 nonfarm payrolls in November, after declining -105,000 in October, modestly exceeding the +50,000 expected by economists surveyed by Bloomberg. Notable job gains occurred in health care (+46,000), construction (+28,000), and social assistance (+18,000).

• U-3 official unemployment rate: 4.6% vs. 4.5% expectation: +0.2% from September 2025.

• U-6 unemployment rate (marginalized, part-time workers for economic reasons): 8.7% (+0.7%).

• Labor force participation rate: 62.5% (+0.1%); Employment-to-population ratio: 59.6% (-0.1%).

• Average hourly earnings for private nonfarm payrolls rose 5 cents to $36.86 (+0.1% month-over-month, +3.5% year-over-year).

• Revisions: September 2025 tapered -11,000 to +108,000; August 2025 curtailed -22,000 to -26,000.

Gross Domestic Product (GDP)³: According to the initial estimate, real GDP increased at an annual rate of +4.3% in the third quarter of 2025 vs. an increase of +3.8% in the second quarter of 2025.

• Consumption: +3.5%; GDP Price Index: +3.8%; PCE Price Index: +2.8%; Core PCE Price Index +2.9%.

• Real disposable personal income: 0.0% vs. +1.8% in the second quarter of 2025.

• Personal savings rate as a percentage of disposable income: 4.2% vs. 5.0% in the second quarter of 2025.

• Average of Real GDP and Real GDI: +3.4% vs. +3.2% in the second quarter of 2025.

Housing Market⁴: Existing-home sales progressed +0.5% (month-over-month) from October to a seasonally-adjusted annual rate of 4.13 million in November. Month-over-month sales expanded in the Northeast and South, +4.1% and +1.1%, respectively, waned -2.0% in the Midwest, and were unchanged in the West.  

• Year-over-year sales faded -1.0%, down from 4.17 million in November 2024.

• Total housing inventory registered 1.43 million units, -5.9% from October, but +7.5% from one year ago (1.33 million units). Unsold inventory sits at a 4.2-month supply at the current sales pace.

• The median existing-home price for all housing types was $409,200, +1.2% from November 2024 ($404,400), as prices rose in the Midwest, Northeast, and South, but retreated in the West.

• Average commitment rate for a 30-year, conventional, fixed-rate mortgage: 6.23%.

• New Home Sales: 800,000 (+20.5% month-over-month) – Last released in September 2025.

1 Source: Bureau of Labor Statistics (BLS), U.S. Department of Commerce, Federal Reserve Bank of New York – Survey of Consumer Expectations, and University of Michigan Surveys of Consumers

2 Source: Bureau of Labor Statistics (BLS)

3 Source: Bureau of Economic Analysis (BEA)

4 Source: National Association of Realtors (NAR), U.S. Census Bureau, and The Department of Housing and Urban Development

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