Navigating Fed monetary policy uncertainty and the markets

Key takeaways

Fed whiplash

Short-term policy uncertainty led to volatility and declines in small-cap stocks, crypto, and non-profitable tech names.

December rate cut

Those calling for a rate cut in December can point to additional data to support one, with weakness in jobs and manufacturing.

Support for stocks

Lower interest rates and our expectation of an improving economy in 2026 can be supportive of stocks in the US.

A well-known senior economics TV reporter recently said that he wishes we could get back to a place where Federal Reserve (Fed) members didn’t talk as much. He even went so far as to say that he wishes we didn’t know their names. They were never intended to be celebrities. His comments were regarding the whiplash Fed speakers have likely been providing to investors.

Consider the past couple of months: In October, Fed Chairman Jerome Powell mentioned dissent within the Fed and stated that a December cut was “far from a foregone conclusion.”¹ Then, in mid-November, Raphael Bostic, President and CEO of the Federal Reserve Bank of Atlanta, advocated for a “higher for longer” stance, reinforcing the idea that restrictive policy might persist.² Yet by late November, John Williams, President and CEO of the Federal Reserve Bank of New York, suggested there was room to lower borrowing costs “in the near term.”³ At that same time, Christopher Waller, a member of the Board of Governors, signaled strong dovish leanings.⁴ Markets went from pricing in a near-certain probability of a rate cut to no probability of a cut, and then back to nearly 100% odds.⁵ Clear enough?

Policy uncertainty and volatility

This short-term policy uncertainty has been enough to bring volatility to markets, with downturns in small-cap stocks, crypto, and non-profitable tech names, to cite a few examples.⁶ For investors, the constant shifts in tone have made positioning more challenging, while the renewed volatility created a buzz of a bubble in the artificial intelligence (AI)-related stocks.

Increased speculation that a former advisor of President Trump, Kevin Hassett, will be named the next Fed Chair is adding a further layer of intrigue about the future of its independence. If Fed independence is seriously challenged, we’d expect long bond yields to rise. This isn’t happening yet, but it could well be an important story in 2026. We’ll watch it closely.

Next rate cuts

Chatter notwithstanding, those calling for a rate cut in December can point to additional data to support it. For example, last week’s ADP National Employment Report showed a 32,000 decline in private-sector jobs, signaling labor market softness.⁷ Surveys of global purchasing managers in the manufacturing sector also demonstrated further weakness.⁸ At the same time, inflation expectations have been declining.⁹ That’s right, declining!

Lower policy rates are not a magic elixir, especially if the yield curve steepens, but we think there’s enough in the recent moves to help some of the more rate-sensitive parts of the economy. Falling policy rates mean cash and money market fund returns are falling. That increases the opportunity cost of holding cash compared to other assets. While we might personally think that cash should migrate to other assets, history suggests that this rarely happens even as rates start to come down.

Lower rates, combined with our expectation of improving economic activity in 2026, could provide a supportive backdrop for stocks. This could lead to a further broadening of market participation in the US.

What to watch this week

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Originally Posted on December 8, 2025

Navigating Fed monetary policy uncertainty and the markets by Invesco US