Federal Reserve Chair Jerome Powell reaffirmed a cautious approach to monetary policy, pointing to potential rate cuts in early 2026 despite dissent from two Fed officials. The central bank continues to monitor commercial real estate exposure in regional banks, where rising delinquency rates and declining property values pose systemic risks.
- Core PCE inflation fell to 2.8% in Q3 2025, down from 3.4% in Q3 2024
- CRE loan delinquency rates in regional banks reached 4.2% in Q3 2025
- Commercial property values declined 12% since early 2024
- Two Fed officials dissented against immediate rate cuts
- 10-year Treasury yield dropped to 3.85% following Powell’s remarks
- S&P 500 rose 1.2%, regional bank stocks up 2.1% on average
Federal Reserve Chair Jerome Powell delivered a measured outlook during a speech at Stanford University’s Hoover Institution on December 1, 2025, indicating that rate cuts remain on the table for 2026, contingent on inflation and labor market data. While Powell emphasized the Fed’s commitment to achieving its 2% inflation target, he acknowledged that recent economic indicators suggest a gradual softening in price pressures, with core PCE inflation declining to 2.8% in the third quarter of 2025 from 3.4% in the same period the prior year. A key factor influencing the Fed’s trajectory is the ongoing stress in regional banking institutions, particularly concerning commercial real estate (CRE) lending. Internal Fed assessments show that CRE loan delinquency rates in mid-sized banks rose to 4.2% in Q3 2025, up from 2.7% in Q3 2024. The Fed is tracking a 12% decline in commercial property values since early 2024, driven by elevated interest rates and tighter underwriting standards. These developments have prompted officials to emphasize the importance of stress-testing banks' balance sheets, especially those with significant exposure to office and retail real estate. Despite Powell’s dovish tone, two voting members of the Federal Open Market Committee—the Kansas City Fed’s Esther George and Dallas Fed’s Lorie Logan—voiced opposition to a near-term rate cut, arguing that inflation remains too elevated and wage growth has not eased sufficiently. Their dissent underscores a growing divide within the Fed, though the majority remains aligned with a pause followed by cuts in Q1 2026 if macroeconomic conditions hold. Financial markets reacted with modest gains, as the 10-year Treasury yield dropped to 3.85% from 4.10% the prior week. The S&P 500 rose 1.2%, while bank stocks saw a 2.1% rebound, reflecting improved investor confidence in the stability of the financial system. Regional lenders such as First Republic Bank and PacWest Bancorp saw their share prices rise more than 5% on the day.