Wall Street Fervor Muzzled at Start of Fed Week

Victoria Fernandez, Chief Market Strategist at Crossmark Global Investments, breaks down her market expectations and explains how she is advising clients going into the new year.

Stocks churned at the start of a week in which investors will search for clues on next year’s interest-rate path as they look beyond an all-but-certain cut at the Federal Reserve’s final meeting of 2025. US bonds weakened.

The S&P 500 dipped after the equities benchmark closed within spitting distance of an all-time high. A busy merger Monday buoyed some sectors after International Business Machines Corp announced plans to buy Confluent Inc. for about $9.3 billion in a big bet on enterprise software for AI tools. Paramount Skydance Corp. made a hostile bid for Warner Bros. Discovery Inc. after President Donald Trump raised potential antitrust concerns on Netflix Inc.’s planned takeover of Warner’s Hollywood studios and streaming business.

US stocks have rebounded in recent weeks after some Fed officials signaled they intend to cut rates for a third straight time on Wednesday. Still, traders are on edge as uncertainty over the pace of easing in 2026 and wariness about the sustainability of an AI-driven rally temper sentiment.

Kevin Hassett, a top candidate to take over the role of Fed chair, said it would be irresponsible for the Federal Reserve to lay out a plan for where it aims to take interest rates over the next six months. The White House National Economic Council Director emphasized the importance of following the economic data on CNBC Monday.

Unease that inflation remains too high has also caused divisions among Fed officials, in a rift that’s been exacerbated by the lack of fresh data during the shutdown. After this week’s likely cut, money markets are leaning toward two more moves by the end of 2026, down from three signaled barely a week ago.

Treasury yields climbed to the highest in more than two months, following losses in most global government-bond markets, ahead of a Federal Reserve interest-rate decision that may alter expectations for monetary policy in 2026.

US yields rose from 3 to 4 basis points across the curve, with intermediate maturities proving the weakest. The market trimmed losses and a sale of $58 billion of three-year notes at 1 p.m. New York time, arrived at a lower than forecast yield, a sign of better than anticipated demand. Auctions of $39 billion 10-years and $22 billion 30-years are set for Tuesday and Thursday, respectively.

The Treasury shifted this week’s auction schedule to accommodate the Fed’s two-day meeting, which concludes with Wednesday afternoon’s announcement. Traders see a roughly 90% chance that the central bank will deliver a third straight quarter-point reduction, to a range of 3.5% to 3.75%. Market participants will focus on officials’ outlook for 2026 — through their so-called dot plot — with inflation remaining stubbornly elevated.

“The expected Fed rate cut this week is expected to come with a hawkish tone and a potentially extended pause next year,” said John Canavan, lead analyst at Oxford Economics. “A strong signal that the Fed is prepared for an extended pause could leave investors disappointed,” with markets pricing in greater than 90% odds of another cut by April.

The benchmark 10-year Treasury yield, which helps determine borrowing costs for home loans and corporate borrowing, rose 4 basis points to 4.17% Monday. The 4.2% level in the maturity has capped rates since September. The

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