What US GDP report means for Fed’s rate decision in January

US stocks are inching higher on December 24 after the nation’s GDP growth came in at 4.3% for the third quarter, well above expectations of 3.2% only.    

The report was delayed due to the extended government shutdown – but the stronger-than-expected data, nonetheless, has reignited debate over the Fed’s next move.

For the US central bank, economic growth is a key input when setting interest rates, and the latest report signals resilience in consumer spending and services.   

Yet with inflation moderating and the labour market slowing down, investors are weighing whether the Federal Reserve will proceed with another rate cut at its January meeting.

Why the Fed may still cut interest rates in January

In a vacuum, the stronger-than-expected GDP report would have favoured not cutting rates further in January.

However, the US labour market, the other major piece of the Fed’s dual mandate, is flashing signs of weakness.

Unemployment rate climbed to 4.6% in November – its highest level in four years.

According to experts, economic strength alone can’t make the Fed decide against cutting rates in January, emphasising that labour market trends remain central to policy decisions.

If hiring continues to slow and inflation remains contained, the central bank may still justify easing next month to prevent further deterioration in employment.

US stocks may rally even if the Fed holds in January

Interestingly, it’s reasonable to assume that US stocks, as represented by the benchmark S&P 500 index, will retain strength even if the Fed decides against lowering interest rates further in January.

Why? Because the market has multiple tailwinds heading into 2026, like artificial intelligence (AI) and the resilience in corporate earnings, which may prove sufficient to sustain momentum even if the Fed pauses.

Plus, even if the central bank skipped a rate cut in January, it will likely still signal one for later in 2026 – and that indication alone may be adequate for investors to remain confident in US equities for now.

What to expect from the US economy and markets in 2026

The US economy enters 2026 with mixed signals: growth remains stronger than anticipated, but the labour market is softening.

Inflation pressures have eased, giving the Federal Reserve room to manoeuvre, though policymakers remain cautious about moving too quickly.

Amidst this mixed data, Chris Rupkey, chief economist at FWDBONDS, believes Fed rates will fall “much faster to neutral in 2026” due to political and institutional pressures.

Others like Michael Pearce of Oxford Economics, however, see the central bank to “remain in the wait-and-see mode for a bit longer.”

That said, while volatility may continue to surround the Federal Reserve’s meetings, the broader narrative suggests US stocks could continue to benefit from structural drivers, keeping Wall Street momentum intact into the new year.  

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