The Federal Reserve’s decision to cut rates for the third time in 2025 has intensified debate among bond investors over the central bank’s future path, with expectations of only one rate reduction in 2026. The move signals a potential pivot toward easing, reshaping expectations across fixed income, equities, and currency markets.
- Third consecutive 25-basis-point rate cut in 2025, lowering the federal funds rate to 4.00%.
- Revised 2026 outlook projects only one rate cut, down from two in prior forecasts.
- U.S. 10-year Treasury yield (US10Y) fell to 4.05% post-FOMC meeting.
- Fed Funds futures imply a 62% probability of a 2026 rate cut.
- S&P 500 (SPX) rose 1.8% on expectations of lower discount rates.
- EURUSD declined to 1.0720, reflecting shifting capital flows amid rate divergence.
The Federal Open Market Committee (FOMC) concluded its December 2025 meeting with a 25-basis-point reduction in the federal funds rate, marking the third consecutive cut this year. The decision, delivered just days after the Fed’s latest policy announcement, was accompanied by a revised projection for a single rate cut in 2026—down from earlier expectations of two. This shift has triggered a re-pricing of near-term bond yields, with the U.S. 10-year Treasury yield (US10Y) dropping to 4.05% from 4.31% at the start of the year. The revised 2026 forecast reflects growing confidence in inflation moderation and a cooling labor market, though core PCE inflation remains above the Fed’s 2% target at 2.8% in November. Market participants are now assessing whether this easing cycle will be prolonged or limited. The implied probability of a 2026 rate cut, as reflected in Fed Funds futures (FEDFUNDS), now stands at 62%, down from 75% in early November. The bond market reaction has rippled across asset classes. U.S. equity indices, particularly growth and technology sectors tracked by the S&P 500 (SPX), rose 1.8% in the session following the announcement, as lower long-term yields reduced discount rates for future earnings. Meanwhile, the euro-dollar exchange rate (EURUSD) dipped to 1.0720, reflecting reduced demand for safe-haven U.S. assets amid shifting global rate differentials. Financial institutions, real estate developers, and energy firms are closely watching the trajectory. Lower borrowing costs are expected to boost refinancing activity and support capital expenditures, though the sectoral impact varies. Energy firms may see modest benefit from reduced financing costs, while real estate developers are reassessing long-term project viability under a new rate framework.