US equities edged higher on December 24 after fresh data showed the US economy expanded at an annualized pace of 4.3% in the third quarter, significantly above market expectations of 3.2%. Although the report was released later than scheduled due to the prolonged government shutdown, the upside surprise has revived debate around the Federal Reserve’s next policy move.
For the Fed, economic growth remains a key consideration when setting interest rates. The latest figures point to ongoing resilience in consumer spending and the services sector. However, with inflation pressures easing and labour market conditions gradually softening, investors are reassessing whether the central bank will proceed with another rate cut at its January meeting.
Why the Fed could still cut rates in January
Taken in isolation, a stronger-than-expected GDP print would normally argue against further monetary easing in the near term. However, the labour market, the second pillar of the Fed’s dual mandate, is showing clearer signs of strain.
The US unemployment rate rose to 4.6% in November, marking its highest level in four years. Economists note that solid headline growth alone is unlikely to dissuade the Fed from cutting rates if employment conditions continue to deteriorate. Should hiring momentum weaken further while inflation remains under control, policymakers may still justify a rate cut in January to prevent deeper labour market damage.
US stocks may hold firm even without a January cut
Even if the Federal Reserve opts to keep rates unchanged in January, US equities may remain supported. The S&P 500 continues to benefit from several structural tailwinds, including advances in artificial intelligence and resilient corporate earnings, which could help sustain market momentum despite a temporary policy pause.
Moreover, a decision to hold rates steady would not necessarily signal the end of the easing cycle. If the Fed indicates that rate cuts are still likely later in 2026, that guidance alone could be sufficient to maintain investor confidence in US stocks over the near term.
What to expect from the US economy and markets in 2026
As the US heads into 2026, economic signals remain mixed. Growth has proven more robust than anticipated, while labour market conditions are clearly cooling. Inflation has moderated, giving the Federal Reserve greater flexibility, though policymakers remain cautious about moving too aggressively.
Chris Rupkey, chief economist at FWDBONDS, expects interest rates to fall “much faster to neutral in 2026,” citing political and institutional pressures. In contrast, Michael Pearce of Oxford Economics believes the Fed is likely to “remain in wait-and-see mode for a bit longer.”
Despite ongoing uncertainty around monetary policy, the broader outlook suggests that US equities could continue to benefit from long-term structural drivers, allowing Wall Street to carry its momentum into the new year even amid periodic volatility around Fed decisions.
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