Fed's Rate Cut December 2025

December 2025 | Choifinance 

The Federal Reserve cut rates three times in the final quarter of 2025 -25bp each in September, October, and December -bringing the federal funds rate from 4.25-4.50% down to 3.50-3.75%. The cuts came after five consecutive holds earlier in the year, delayed by tariff-driven inflation that kept the Fed stuck through the summer. The first five months of 2025 saw rising internal division, with Governors Bowman and Waller dissenting at the July meeting -the first time two Governors had dissented together since 1993.

By December, the FOMC was split three ways. Three officials dissented from the final cut -one wanting a bigger move, two wanting no cut at all -the most dissents since September 2019. The December dot plot projected just one more cut in 2026, with seven of nineteen officials calling for none. January 2026 was a hold at 3.50-3.75%. 

So the easing cycle everyone expected to last well into 2026 may already be over. The question now is what that means for each part of a portfolio.

Growth Tech

Lower rates directly expand the present value of future cash flows, which is why long-duration growth stocks benefit the most from cuts. The maths is simple: when you discount earnings 5-10 years out at a lower rate, those distant profits are worth more today.

Apple (AAPL) is a good example. The stock crashed over 30% to a low of $169.21 in April during the tariff selloff, then rallied through the rate-cutting cycle to hit an all-time closing high of $285.92 in early December. FY2025 revenue came in at $416 billion with double-digit EPS growth. The Nasdaq-100 returned +20.77% for the year -its third straight year above 20%.

The risk: that April drawdown proves growth tech is just as exposed to hawkish surprises as it is rewarded by cuts. If tariff pass-through pushes inflation back up and the Fed pauses for the rest of 2026, valuations at 30x+ earnings have limited room for error.

REITs

This is where the rate story gets more complicated. The Fed cut short-term rates by 175bp since September 2024 -but the 10-year Treasury yield barely moved. It stayed stubbornly near 4.0-4.5% through most of 2025, pinned up by sticky inflation expectations and rising term premiums.

That matters because REITs compete with Treasuries for income investors. When a 10-year bond yields 4.3% risk-free and Realty Income (O) yields 5.2%, the spread is too thin to attract new capital. The Vanguard Real Estate ETF (VNQ) returned just +3.26% for 2025 -well behind the S&P 500's +17.88%. Realty Income itself traded in a tight range between $50 and $62 all year, barely responding to each cut.

The takeaway is that REITs need long-end rate relief, not just short-rate cuts. Until the 10-year breaks convincingly below 4%, the sector will likely keep lagging.

Banks

The obvious concern with rate cuts is net interest income compression -banks earn the spread between what they pay depositors and what they charge borrowers, and when rates fall, that spread narrows. But 2025 showed that a well-diversified bank can absorb it.

JPMorgan Chase (JPM) posted record full-year revenue of $185 billion in 2025, up 7% year-on-year. NII ex-Markets was down 2% in Q1 but had recovered to up 4% by Q4, driven by higher deposit balances and growing revolving credit card balances. Record markets revenue -equities trading hit $2.9 billion in Q4, up 40% -and $553 billion in client asset net inflows more than offset the rate headwind. The stock went from ~$240 to ~$310. The Financial Select Sector (XLF) returned +14.89% for the year.

The lesson: if rates stay around 3.50% through 2026, banks with strong trading desks and fee businesses hold up fine. The risk is if cuts resume aggressively -another 100bp would start squeezing even JPMorgan.

Luxury & Consumer Discretionary

Ultra-high-end consumer names turned out to be the most rate-insensitive part of the portfolio. Ferrari (RACE) grew revenue 7% to €7.15 billion in 2025 with EBIT margins hitting 29.5% -their clients don't check mortgage rates before ordering a Purosangue. Industrial free cash flow surged 50% to €1.54 billion.

But the stock still fell roughly - 20% for the year. A Capital Markets Day in October revealed 2030 targets below what the market expected, and the P/E derated from ~60x to ~37x. The order book stretches to end of 2027. The business is fine. The lesson is that pricing power alone can't hold up a 60x multiple when growth expectations come down even slightly.

The broader consumer picture is weaker. The University of Michigan consumer sentiment index hit 52.9 in December -in the bottom 1% historically. The Conference Board's expectations index dropped to 65.1 in January 2026, well below the 80 threshold that's historically preceded recessions. 75% of consumers reported trading down in Q4. The split between upper-income spending (strong) and everyone else (weak) is as wide as it's been in years.

Healthcare & Defensives

In a rate-cutting cycle, defensives typically underperform growth. Capital rotates out of "safe" sectors and into higher-beta names. Healthcare followed this script through mid-2025 -it was the second-worst-performing S&P sector through June, returning - % YTD.

Then the rotation reversed. Healthcare became the best-performing sector in Q4 at +7%, as drug pricing agreements reduced policy uncertainty and Buffett's $1.6 billion UnitedHealth purchase triggered sector-wide ETF inflows.

AstraZeneca (AZN) shows why stock-picking matters even in a "boring" sector. Full-year revenue hit $58.7 billion (+9%) with 16 positive Phase III readouts and 16 blockbuster medicines in the portfolio. The stock returned ~25% over the trailing 12 months -not because of rates, but because the pipeline delivered. Healthcare doesn't need rate cuts to work; it just needs catalysts.

What it means going into 2026

The CME FedWatch tool prices roughly two more 25bp cuts in 2026, with the most likely year-end target at 3.00- 3.25%. The first cut isn't expected before June. The December dot plot median called for just one cut.

But three wild cards make any prediction fragile. First, businesses absorbed roughly 80% of tariff costs in 2025 -that's expected to flip to 20% in 2026 as they pass costs to consumers, which could push inflation back above 3% and kill any further easing. Second, Powell's term expires May 15, 2026, with a DOJ criminal probe and a Supreme Court case on Fed independence adding political noise. Third, commercial real estate faces a $936 billion maturity wall in 2026 -up 18.6% from 2025 -with CMBS delinquencies at 6.59%.

The tension is clear: the labor market says cut, inflation says wait. The most recent Fed minutes describe the inflation path as "uneven" and the committee as "well positioned to wait." For portfolio positioning, that means growth tech stays the biggest winner if cuts resume, REITs stay stuck until the 10-year moves, banks hold up at current rates, luxury demand stays strong but multiples are capped, and defensives like healthcare offer late-cycle protection with upside if you pick the right names.

The most likely path is an extended pause through mid-year, then one or two data-dependent cuts in the back half - unless tariff pass-through or a recession scare forces the Fed's hand in either direction.

Why these stocks

The five names referenced throughout - Apple, JPMorgan Chase, Ferrari, Realty Income, and AstraZeneca - are the holdings that was used in the simulation portfolio in my university's society. Although they have changed to adjust to sector changes and macro trends, they weren't picked at random. Each one was chosen to represent a different sector with a different rate sensitivity: growth tech, financials, luxury consumer discretionary, real estate, and healthcare.