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

• US stocks could rally regardless of Fed's January decision due to AI tailwinds and resilient corporate earnings
• Economists are divided: some expect rapid rate cuts to 'neutral' in 2026 while others see Fed remaining in 'wait-and-see mode'
• Mixed economic signals show growth outperforming while employment deteriorates, creating a complex policy environment for the Fed

US GDP Growth Exceeds Expectations, Complicating Fed's January Rate Decision

The US economy expanded at a robust 3.4% annualized rate in Q3, surpassing the 3.2% forecast, according to delayed GDP data released December 24. This stronger-than-expected growth has sparked debate about the Federal Reserve's potential rate decision at its January meeting.

Key Economic Indicators:

• Q3 GDP growth: 3.4% (vs. 3.2% expected)
• Unemployment rate: 4.6% in November (highest in 4 years)
• Consumer spending and services sectors showed particular resilience

Fed Policy Implications:

Despite strong GDP figures, the Fed faces conflicting signals. While economic growth would typically argue against further rate cuts, the deteriorating labor market presents a counterargument. With unemployment climbing to four-year highs and inflation moderating, the central bank must balance these competing factors.

Market Outlook:

Analysts suggest US equities, particularly the S&P 500, could maintain strength regardless of the Fed's January decision. Key market drivers include:

• Continued AI sector momentum
• Resilient corporate earnings
• Expectations of eventual rate cuts in 2026

Expert Views:

• Chris Rupkey (FWDBONDS): Expects rates to fall "much faster to neutral in 2026"
• Michael Pearce (Oxford Economics): Anticipates Fed will "remain in wait-and-see mode"

2026 Forecast:

The US economy enters 2026 with mixed signals—strong growth but softening employment. While near-term volatility may persist around Fed decisions, structural market drivers suggest continued support for US stocks. Even if the Fed pauses in January, signaling future cuts could maintain investor confidence throughout the year.