Fed’s Next Steps and Markets’ Reactions

Matthew Hornbach and Michael Gapen discuss the recent FOMC meeting, where the Fed cut rates by 25 basis points. Michael Gapen highlights key takeaways, including the Fed's shift from risk management cuts to data dependence, confidence in declining inflation, and the explicit ruling out of rate hikes. They delve into technical factors affecting labor market data, such as annual benchmark revisions, and discuss the impact of tariffs on inflation, agreeing with Chair Powell's expectation of a peak in tariff-related inflation in Q1 2026. Michael Gapen provides an outlook for Fed policy in 2026, predicting further rate cuts in January and April. Matthew Hornbach explains the market's reaction to the meeting, attributing the rally to investors' increased confidence in future rate cuts based on Powell's dovish remarks. Finally, they discuss the outlook for longer-term rates and the dollar, expecting stable to lower long-term yields and continued dollar depreciation in the first half of 2026.