The US stock market is gaining ground on 24 December after GDP growth for the country’s third quarter was 4.3%, which exceeded the expected 3.2%.
The report was delayed due to the extended government shutdown – but the stronger-than-expected data, nonetheless, has reignited debate over the Fed’s next move.
The US central bank considers economic growth a major factor when setting rates. It is also encouraged by the recent report that shows a resilience in service and consumer spending.
Investors are still weighing up whether or not the Federal Reserve, with its inflation moderated and labour market easing down, will make another rate reduction at their January meeting.
The Fed could still reduce interest rates by January
In a vacuum, the stronger-than-expected GDP report would have favoured not cutting rates further in January.
The US labour market is also showing signs of weakness, which falls under the Fed’s dual-mandate.
The unemployment rate reached 4.6%, its highest level for four years.
Experts say that economic strength is not enough to convince the Fed to cut rates in January. They also emphasize that trends on the labour market remain central for policy decisions.
The central bank could still ease next month if hiring slows down and the inflation rate remains low. This would prevent a further decline in employment.
US stock prices may rise even if Fed does not hold in January
It’s interesting to note that US stocks as represented by S&P 500 will remain strong even if Fed does not decide to lower interest rates any further in January.
Why? Why?
Even if it skips a rate reduction in January, the central bank will still likely signal a cut for 2026. This alone could be enough for investors to stay confident about US stocks for now.
Expectations for the US Economy and Markets in 2026
US economic growth is stronger than expected, but there are signs of a softening labour market.
The Federal Reserve has more room for manoeuvre now that inflation pressures are lessened, but policymakers still remain cautious to move too fast.
Chris Rupkey believes that despite this mix of data, the Fed rate will “fall much faster in 2026 to neutral” because of political and institution pressures.
Some, like Michael Pearce from Oxford Economics, believe that the central bank should “remain on the watch-and-see” mode for just a little bit longer.
While volatility is likely to continue around the Federal Reserve meetings, the larger narrative indicates that US stocks may benefit from structural factors, maintaining Wall Street’s momentum into the New Year.
The post Fed to decide on rate in January based on US GDP data may change as new information becomes available.
