A Fine Balance
The Federal Open Market Committee (FOMC) dropped its key interest rate by 0.25% to 3.50–3.75%. Going into 2026, we see signs that fiscal stimulus will be more meaningful in addressing the current weakening labor market.
Key takeaways
- Outlook on rates: This was the third rate cut for 2025; we expect no further cuts until the second half of 2026.
- Labor and inflation: Inflation has remained sticky, while the labor market has continued to deteriorate.
- Market implications: Bonds are fairly to expensively priced; equities seem to have entered a new phase of expectations for artificial intelligence (AI).
Today, the FOMC announced another 0.25% cut, reducing its key interest rate (the federal funds rate) to 3.50–3.75%. The committee, along with market participants, continues to face challenges from the U.S. government shutdown, with various agencies trying to catch up on the data publishing schedule. As a result, it had to make this decision using stale data and balancing risks. The FOMC also commented on balance sheet management, announcing Treasury bill purchases to begin again in 2026, which are expected to maintain ample reserves.
Today also saw a new set of dots added to the Federal Reserve’s (Fed’s) dot plot. Dispersion among the FOMC on where the terminal rate lies is revealing. As 2026 begins, we believe the makeup of the board’s voting members will come into greater focus and that, while the market is relatively optimistic (pricing in two more rate cuts by the end of 2026), we expect cuts will come after June, with the FOMC on pause starting in January.
Inflation has remained sticky, with the headline rate at 3%, which is higher than the 2% target. This is stale data from September, and survey measures indicate a pick-up in headline inflation. We’re now seeing the impact of tariffs on prices. Crucially, the first quarter of 2026 should see some tailwinds on the year-over-year figures for inflation to the downside, which could offset some cost pressures from tariffs. When inflation is accompanied by strong growth, it’s not an inherent negative for markets; indeed, available U.S. growth data has continued to paint a rosy picture.
The paradox remains. With a deteriorating labor market accompanied by better growth, the FOMC must balance its dual mandate and how it communicates its views. Over the long term, we believe the Fed will tolerate inflation above 2%—if growth remains resilient—acknowledging the risks of overly precise inflation targeting, but the labor market is a greater political challenge. Labor markets have experienced a structural shift this year, driven by a combination of demographics and migration. We believe fiscal stimulus would be a more impactful tool to address these challenges.
Bond markets have remained fairly to expensively priced, with U.S. 10-year yields around 400–410 basis points (bps; 100 bps equal 1%). Tight corporate spreads make new positions less attractive. Equities have been fascinating, with the AI theme clearly evolving into a new phase. Commodities offer an opportunity for adding alternative exposure, aside from precious metals but across industrials and parts of the energy complex. This may be especially true should U.S. growth run hotter and inflation expectations start to re-rate amid a “run it hot” Fed narrative, post June 2026.
ALL-12092025-ccdtuw1l
Related insights
Allspring PMs keep their fingers on the pulse of the markets—and their selfie cameras—going into 2026.
George Bory and Ann Miletti share Allspring's 2026 outlook. From resilient bond strategies to AI-powered equity growth, they unpack the key drivers set to shape next year's financial markets.
Which macroeconomic trends do we think matter the most? Read this month’s issue of Macro Matters.
Article
Nothing to See HereDespite limited access to reliable data due to the ongoing government shutdown, the Federal Open Market Committee (FOMC) announced another 0.25% cut, lowering its key interest rate to 3.75–4.00%.
How are Allspring’s investment experts thinking about the U.S. government shutdown and market implications?
Macro Matters provides a concise, comprehensive look at macroeconomic themes that matter to clients.
The Federal Reserve lowered its key rate by 25 basis points at its September meeting following an eight-month pause. George Bory and John Campbell discuss how U.S. bond and equity markets could respond.
Macro Matters provides a concise, comprehensive look at macroeconomic themes that matter to clients.
Macro Matters provides a concise, comprehensive look at macroeconomic themes that matter to clients.
With a robust U.S. economy, above-target inflation, and continued tariff uncertainty, the FOMC kept its key interest rate at 4.25–4.50%.
Macro Matters provides a concise, comprehensive look at macroeconomic themes that matter to clients.
Speculation over the next chair of the Federal Reserve (Fed) is dominating headlines and keeping markets on edge. A more dovish leader could mean a big shift in monetary policy and raise concerns about the Fed’s independence.
As the events concerning Iran continue, Allspring Fixed Income’s message—"bonds provide certainty in an uncertain world”—remains central to our positioning.
A potential conflict with Iran has consistently appeared in our monthly Market Risk Monitor for over two years. Now that risk has materialized. Our equity portfolio managers assess the implications for global markets.
What might the future hold for markets? In this roundtable discussion, our investment experts explore pressing topics like deficit spending, trade tensions, the Fed’s next moves, and the weakening U.S. dollar.
With ongoing tariff uncertainty and U.S. employment still strong, the Fed kept its key interest rate at 4.25–4.50%.
Amid uncertainty around tariffs and their impact on U.S. growth and inflation, the Federal Reserve held its key interest rate at 4.25–4.50%. We explain what may lie ahead.
Macro Matters provides a concise, comprehensive look at macroeconomic themes that matter to clients.
George Bory discusses three key U.S. headlines from April 22 and how fixed income assets may be affected.
George Bory discusses reasons for the recent sharp price fluctuations in stock & bond markets, including in U.S. Treasuries, and identifies actionable approaches fixed income investors may pursue in today’s environment.
Macro Matters provides a concise, comprehensive look at macroeconomic themes that matter to clients.
Article
Tariffs: A New NormalPresident Trump announced specific details on the administration’s intended trade policy, including a baseline tariff as well as reciprocal tariffs on specific countries. Uncertainty lies ahead as global markets digest the prospects.
At its March meeting today, the Fed kept the federal funds rate at 4.25–4.50% amid concerns around tariffs and their potential impact on U.S. growth and inflation.