A New Year, A New Rosy Fed

MONETARY

• Pursuant to the December FOMC Meeting, the Federal Reserve opted to lower its benchmark Federal Funds Target Rate by 25bps to a level of 350-375. This marks the third time this year the Federal Reserve lowered its target rate (September, October, December)¹
  • Chairman Powell noted that although comprehensive data is still not yet available, data that is available paints a positive picture¹
    • (Powell) “Although some key government data have yet to be released, available indicators suggest that economic activity has been expanding at a moderate pace. Consumer spending appears to have remained solid, and business fixed investment has continued to expand”¹
  • Regarding inflationary pressures, Powell noted that a divergence between goods inflation and services inflation appears to be burgeoning, but that longer-term inflation expectations remain well-anchored¹
    • (Powell) “Very little data on inflation have been released since our meeting in October. Total PCE prices rose 2.8 percent over the 12 months ending in September and, excluding the volatile food and energy categories, core PCE prices also rose 2.8 percent. These readings are higher than earlier in the year as inflation for goods has picked up, reflecting the effects of tariffs. In contrast, disinflation appears to be continuing for services. Near-term measures of inflation expectations have declined from their peaks earlier in the year, as reflected in both market- and survey-based measures. Most measures of longer-term expectations remain consistent with our 2 percent inflation goal.”¹
  • FOMC participants generally feel the current level of Fed Funds Rate is more or less consistent with the idea of a neutral policy stance (neither restrictive nor accommodative)¹
    • (Powell) “The adjustments to our policy stance since September bring it within a range of plausible estimates of neutral and leave us well positioned to determine the extent and timing of additional adjustments to our policy rate based on the incoming data, the evolving outlook, and the balance of risks.”¹
  • Separately, the Fed made the choice to initiate purchases of Treasury Bills to ensure an ample supply of cash reserves in the banking system. Important to note, this move is not intended to produce quantitative easing effects¹
    • (Powell) “Accordingly, at today’s meeting, the Committee decided to initiate purchases of shorter-term Treasury securities (mainly Treasury bills) for the sole purpose of maintaining an ample supply of reserves over time. Such increases in our securities holdings ensure that the federal funds rate remains within its target range, and are necessary because the growth of the economy leads to rising demand over time for our liabilities, including currency and reserves. As detailed in a statement released today by the Federal Reserve Bank of New York, reserve management purchases will amount to $40 billion in the first month and may remain elevated for a few months to alleviate expected near-term pressures in money markets.”¹
    • (Powell) “In our implementation framework, an ample supply of reserves means that the federal funds rate and other short-term interest rates are primarily controlled by the setting of our administered rates rather than day-to-day discretionary interventions in money markets. In this regime, standing repurchase agreement (or repo) operations are a critical tool to ensure that the federal funds rate remains within its target range, even on days of elevated pressures in money markets”¹
• Chairman Powell also pointed out that internal economic growth forecasts from FOMC participants also ticked up in the recent release¹
  • (Powell) “So a number of things are driving what’s happening in the forecast. And I would say, if you look broadly at outside forecasts, you do see a pickup in growth in many of those now, too. So it is — it’s partly that consumer spending is held up, it’s been resilient and it — to another degree, it is that AI — spending on data centers and related to AI has been holding up business investment. So, overall, the baseline expectation for next year is — at least at the Fed and I think with outside forecasters, too, is a pickup in growth from today’s relatively low level of 1.7. percent”¹
  • (Powell) “But, overall, yes, you know, the — you know, for a few reasons. Fiscal policy is going to be supportive. And, as I mentioned, AI spending will continue. The consumer continues to spend. So it looks like the baseline would be solid growth next year.”¹

GEOPOLITICS

• Russia-Ukraine peace negotiations see another major developments, as world leaders appear to get closer to finalizing a deal to end the war²
  • Ukrainian President Zelensky traveled to Mar-a-Largo on December 28-29 for talks with President Trump²
  • President Trump noted that negotiations are about 95% completed, however did acknowledge that significant ‘thorny’ issues still remain regarding security guarantees and territorial disputes²
    • Progress was reportedly made on the topics of a potential demilitarized zone, as well as on the topic of potential joint working groups pertaining to security and economic matters²
  • Prior to President Trump’s meeting with Zelensky, Trump held a lengthy phone call with Russian President Vladimir Putin which was described as ‘very productive’²
• In response to the United States’ $11B weapons sale to Taiwan, China sanctions 20 U.S. Defense companies, as well as 10 executives of those companies³
  • As expected, China’s retaliation is predicated on the notion that it has claimed Taiwan as its own territory³
    • (Chinese Foreign Ministry) “We stress once again that the Taiwan question is at the very core of China’s core interests and the first red line that must not be crossed in China－S. relations”³
    • (Chinese Foreign Ministry) “Any company or individual who engages in arms sales to Taiwan will pay the price for the wrongdoing”³
  • The arms package is the largest ever granted to Taiwan by the United States, and is the second arms package granted under the current Trump Adminstration³
    • (Taiwan Defense Ministry) “The United States continues to assist Taiwan in maintaining sufficient self‑defence capabilities and in rapidly building strong deterrent power and leveraging asymmetric warfare advantages, which form the foundation for maintaining regional peace and stability”³

[See Below for Disclosures & Annotations]

DISCLOSURES

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

The companies presented here are for illustrative purposes only and are not to be viewed as an investment recommendation.

Tax laws and regulations are complex and subject to change, which can materially impact investment results. LPL Financial does not provide tax advice. Clients should consult with their personal tax advisors regarding the tax consequences of investing.

ANNOTATIONS

1. Federal Reserve. “Transcript of Chair Powell’s Press Conference”. December 10, 2025
2. Reuters. “Trump says US and Ukraine ‘a lot closer’ on peace deal but ‘thorny issues’ remain”. December 29, 2025
3. NBC. “China sanctions 20 U.S. defense companies and 10 executives over massive arms sales to Taiwan”. December 26, 2025