As December begins, all eyes are on the Federal Reserve’s final interest rate meeting of 2025, scheduled for December 9–10. Traders have already priced in a 25 basis point cut, with CME FedWatch showing an 87% probability. Yet the real drama lies not in the cut itself, but in what comes next: the trajectory of rates in 2026 and the looming question of the Fed’s independence under political pressure.
Labor Market Freeze: AI’s Role in Youth Unemployment
The Fed’s dovish tilt is being driven by a sharp deterioration in employment data. Goldman Sachs’ Jan Hatzius flagged September’s delayed non-farm payrolls, which showed just 39,000 new jobs, far below expectations. October data worsened the picture.
Most striking is the surge in unemployment among college graduates aged 20–24, now at 8.5%, up 70% from 2022 lows. Analysts describe this as a "white-collar recession"—a structural displacement of entry-level jobs by AI. Companies are increasingly using AI for clerical and analytical tasks, leaving young workers sidelined. This trend has forced the Fed to prioritize employment support, even at the risk of stoking inflation.
Goldman Sachs Forecast: Rates Could Fall Toward 2%
Goldman Sachs projects that the Fed’s easing cycle will extend well into 2026. The bank expects:
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Economic Growth: A rebound to 2–2.5% as tariffs fade, Trump-era tax cuts take hold, and monetary policy loosens.
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Rate Path: A pause in January 2026, followed by cuts in March and June, bringing the federal funds rate down to 3–3.25%, with the possibility of dipping below 3%—a return to the "2% era."
This outlook reflects both weak labor conditions and expectations of policy support ahead of the midterm elections.
Trump’s Shadow Chairman: Hassett and Fed Independence
Beyond data, politics looms large. With Jerome Powell’s term nearing its end, speculation is mounting over his successor. Reports suggest President Trump favors Kevin Hassett, director of the National Economic Council and a supply-side economist.
Markets fear Hassett could act as a policy proxy for Trump, undermining Fed independence. John Stopford of Ninety One warned that Hassett’s appointment would "seriously damage the Fed’s credibility." While PGIM’s Gregory Peters noted that decisions are made collectively, investor anxiety is already reflected in bond pricing.
The Treasury has reportedly held meetings with Wall Street executives to gauge sentiment, but these discussions have only heightened concerns. Investors worry that a Hassett-led Fed could push for unconventional cuts to align with Trump’s preference for a weak dollar and low rates.
Bond Market Warning: Fiscal Dominance Risks
The most pessimistic scenario comes from Louis-Vincent Gave of Gavekal Group, who argues that the U.S. is sliding into fiscal dominance—where the Fed becomes an arm of the Treasury. In this model, monetary policy serves fiscal needs, printing money to fund deficits.
If investors lose faith in the Fed’s ability to control inflation independently, Gave warns, the bond market could unravel. Selling Treasuries might become the only safe-haven strategy, triggering systemic instability.
Powell’s Tightrope Walk
Next week’s meeting places Powell in a precarious position. He must acknowledge weak employment without sparking recession fears, while defending the Fed’s credibility against political interference. The December cut is largely priced in, but markets will scrutinize the dot plot and post-meeting statement for clues about 2026.
Key questions include:
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Will the Fed signal a path toward Goldman’s projected easing cycle?
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How will it address youth unemployment tied to AI displacement?
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Can Powell reassure investors about the Fed’s independence amid speculation over Hassett’s rise?
Investor Implications
For equity markets, the December cut may offer little upside, as expectations are already baked in. The real focus is on the long-term rate trajectory and the Fed’s ability to navigate political headwinds.
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Equities: A dovish Fed supports valuations, but structural labor weakness raises questions about earnings growth.
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Bonds: Fiscal dominance fears could pressure Treasuries, making duration risk harder to manage.
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AI Sector: While AI drives productivity, its role in displacing jobs could trigger regulatory scrutiny and shape Fed policy indirectly.
Conclusion: More Than Just a Rate Cut
The December meeting is not just about a 25 basis point move. It is about the Fed’s credibility, the trajectory of rates in 2026, and the broader economic narrative of AI-driven disruption. Powell faces one of his toughest balancing acts yet, caught between weak employment data, political pressure, and investor skepticism.
For markets, the cut is yesterday’s news. The real story is whether the Fed can maintain independence and guide the economy through a turbulent 2026.