The Federal Reserve closed out the year with a widely anticipated 25 basis point cut, bringing the federal funds rate down to 3.50%–3.75%. While the move itself was expected, the tone surrounding it was anything but celebratory. Instead of signaling the start of a steady easing cycle, policymakers emphasized uncertainty, long-run structural changes, and a much slower path forward. For investors and property owners, this meeting was less about the cut and more about the outlook—and that outlook is becoming clearer: lower rates are coming, but not quickly, and not unanimously.
A Split Vote That Reframes the Conversation
One of the most important developments wasn’t the cut—it was the fractured vote behind it. Several policymakers preferred to hold rates steady, marking one of the most divided decisions in recent years.
Why this matters:
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The Fed is no longer aligned on how quickly conditions are weakening.
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Future cuts will require stronger justification than earlier in the cycle.
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Market expectations for consistent, predictable easing need to be recalibrated.
The internal disagreement signals that rate decisions going into 2025 and 2026 will likely be debated, data-dependent, and slower than markets previously assumed.
The Long-Run Rate Is Rising—And That Changes Everything
Alongside the decision, the Fed released updated long-term projections showing a meaningful shift: the estimated “neutral” rate—the policy level that neither stimulates nor restricts the economy—is now viewed as higher than previously thought.
Key takeaways:
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The Fed now sees the economy sustaining around 3% as a normal long-run rate.
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This is notably above the pre-pandemic assumption of 2.5%.
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A higher neutral rate means borrowing costs may not return to the exceptionally low levels of the 2010s.
This doesn’t indicate a problem—it reflects confidence in economic resilience. But for investors, it reinforces the importance of adjusting underwriting assumptions and return expectations.
What the Road to 2026 Actually Looks Like
While the Fed still expects some additional easing, the path ahead is uneven and restrained.
Several forces will shape the next two years:
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Split views among policymakers
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Slowing momentum in labor markets
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Cautious inflation progress
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Technical balance-sheet adjustments through Reserve Management Purchases
The overall message: rates may drift lower, but we should expect interruptions along the way.
Rather than a straight decline, the next phase will likely bring short-lived dips, sharp reactions to economic data, and shifting timelines for when (and whether) each cut occurs.
What Investors Should Be Doing Now
Periods of volatility can be advantageous—but only if you're prepared.
Here are the strategies that matter most in the current cycle:
✔ Start early on financing and refinancing conversations
Lenders move quickly when rates dip; borrowers should too.
✔ Avoid waiting for the “perfect moment”
Trying to time the lowest possible point often leads to missed opportunities.
✔ Build flexibility into deal structures
Floating-rate options, rate locks, and lender negotiations become more meaningful during choppy periods.
✔ Stress-test your assumptions
Use a higher long-run rate so underwriting doesn’t rely on overly optimistic declines.
✔ Monitor Treasury movements closely
The market will likely offer brief windows of favorable pricing in response to data releases.
Investors who approach the next phase proactively will be better positioned than those waiting for a smooth cycle that may never materialize.
FAQ
Q1: Will the Fed continue to cut rates next year?
Gradual cuts remain possible, but today’s split vote suggests a slower, more cautious trajectory.
Q2: Why is the neutral rate increasing?
The Fed believes long-term economic fundamentals now support a higher baseline interest rate.
Q3: Does this affect financing long term?
Yes—borrowing costs may remain structurally higher than the ultra-low levels seen earlier in the decade.
Q4: Should investors wait for rates to fall further?
Not necessarily. Volatility often creates short, advantageous windows that reward readiness.
Need Help Positioning Your Strategy for the New Rate Environment?
The R&Z Group helps investors analyze financing conditions, evaluate opportunities, and build resilient strategies in shifting markets.
Reach out today for guidance tailored to your investment goals.
