Fed Meeting to Decide Whether Markets Hit Record Highs or Face ‘Coal’ for Christmas

December 7, 2025

As the holiday season approaches, investors are turning their attention away from festive decorations and toward Washington, where the Federal Reserve is preparing for one of the most consequential policy meetings of the year. Scheduled for December 9–10, the gathering of the Federal Open Market Committee (FOMC) may determine whether Wall Street enjoys a classic “Santa Claus rally” or is handed a symbolic lump of coal as the year draws to a close.

The stakes are unusually high. While December traditionally favors equity markets, this year’s rally hinges less on seasonal optimism and more on the Federal Reserve’s decisions about interest rates and future guidance. With stocks sitting just inches from all-time highs, traders and strategists agree: the Fed’s tone, projections, and forward-looking policy cues will dictate the market’s final act of 2025.

A Market Waiting for Santa — or a Setback

Holiday cheer typically boosts investor sentiment, and the “Santa Claus rally” — a burst of buying that often occurs in the final week of December and first days of January — is a well-documented seasonal trend. But its arrival is never guaranteed, and this year, the Fed stands squarely in its path.

Analysts are already sharply divided. Some see a strong environment for a rally, while others caution that the Fed’s messaging could easily derail the momentum.

Fawad Razaqzada, market analyst at StoneX, captured the mood succinctly:

“The key question hanging over markets is whether a potential Federal Reserve rate cut next week can trigger a so-called Santa rally.”

The S&P 500 has shown resilience, recovering swiftly from a 5.1% decline in early November and closing the week of December 5 within 0.3% of its all-time high. But hesitation remains. Every investor knows that the Fed’s December meeting has, in past years, produced unexpected volatility — and sometimes disappointment.

A Rate Cut That Markets Believe Is Coming

One of the clearest signals coming into the FOMC meeting is market conviction. A December interest rate cut is not just anticipated — it is effectively priced in.

According to the CME FedWatch Tool:

• 87% probability of a 25-basis-point cut

This confidence stems partly from renewed economic momentum. The resolution of the recent U.S. government shutdown has allowed government agencies to resume releasing official data, removing a cloud of uncertainty that had stalled algorithmic models and delayed institutional decision-making.

With labor-market data again flowing, and economic indicators stabilizing, investors view the case for a December cut as solid. But they also know that markets rarely react to what they already expect. The true story lies in what comes next.

Why the Fed’s 2026 Outlook Matters More Than the Cut Itself

The December rate cut may be the headline, but the Summary of Economic Projections (SEP) — specifically, the Fed’s vision for inflation, unemployment, and interest rates through 2026 — will likely dictate the market’s trajectory.

Investors are looking for clues about the Fed’s longer-term thinking:

• Will there be two, three, or even four rate cuts next year?

• How does the Fed view inflation’s path?

• Is the central bank comfortable with easing more aggressively if growth slows?

• How will political dynamics influence policy, given the 2026 budget cycle and Powell’s term nearing its end?

Bret Kenwell, U.S. investment analyst at eToro, noted:

“It’s going to come down to what the Fed is looking at with their projections for 2026… That’s going to give us the idea of whether we can have this Santa Claus rally at the end of the month.”

This underscores a crucial point: markets care less about what the Fed does and more about what the Fed says.

A December cut without supportive future guidance could easily disappoint investors. A cut paired with a dovish 2026 outlook, however, could send markets charging toward fresh highs.

Could Powell Spoil the Party? A Look at Fed Communication Risk

Jerome Powell’s press conference following the FOMC meeting may prove just as influential as the rate decision itself. In previous years, even when the Fed delivered expected cuts, Powell’s tone — particularly warnings about inflation or speculative excess — has thrown cold water on market sentiment.

Analysts caution that Powell may take a measured or even hawkish stance to avoid fueling excessive risk-taking, especially given last year’s volatile reaction following the December meeting.

The Fed Chair must walk a fine line:

• Encourage stability

• Avoid triggering fear

• Signal future cuts

• Maintain inflation credibility

• Stay politically neutral

With Powell’s term ending in May and President Donald Trump expected to nominate a successor who favors lower rates, political speculation adds another layer of complexity. Markets may respond sharply if Powell’s remarks hint at disagreements within the committee or reluctance to commit to guidance beyond 2025.

Options Market Signals a Big Move Coming

Perhaps the most telling indicator of looming volatility comes from the options market. Traders are pricing in a 1.3% move for the S&P 500 on Wednesday — the largest implied swing left for the year.

This reflects a perfect storm of factors:

1. The “Data Blindness” Problem

The government shutdown temporarily disrupted flows of critical data used in automated trading models. Without reliable inputs, institutional players have been forced into short-term, reactionary strategies, amplifying volatility around major announcements.

2. “Buy the Rumor, Sell the News” Mechanics

Market rallies ahead of big events often reverse sharply once the news is released — especially when expectations are high. Given the strong rebound since Thanksgiving, investors fear this dynamic may repeat.

3. Political Uncertainty

The possibility that Trump’s next Fed chair may be more aggressively dovish introduces longer-term speculation. Markets may overreact to the slightest clue about future policy shifts.

George Kailas, CEO of Prospero.ai, described the fragile balance:

“I can easily see the Nasdaq Composite going up another 5% to 10% the next few weeks — or going the other way.”

This summarizes the mood: bullish ambition mixed with nervous energy.

Weekly Performance: Calm Before the Storm?

Despite looming uncertainty, major U.S. indexes posted modest gains heading into the meeting:

• Dow Jones: +0.5%

• S&P 500: +0.3%

• Nasdaq Composite: +0.9%

These gains signal cautious optimism rather than exuberant confidence. Investors are participating in the rally — but not enough to push the market decisively to new highs without confirmation from the Fed.

Key upcoming data releases will also influence sentiment:

• Job openings (Tuesday)

• Initial jobless claims (Thursday)

With labor metrics playing an outsized role in Fed decision-making, traders will study these numbers closely for any hints of weakening or overheating.

Why This Fed Meeting Matters More Than Usual

This week’s FOMC meeting stands at a rare intersection of:

• Market momentum
• Seasonal tendencies
• Political shifts
• Transitioning monetary policy
• Economic data uncertainty

All of these elements converge just weeks before year-end — a period when investors typically rely on predictable cycles and historical tendencies to guide decisions. But the landscape in 2025 is anything but predictable.

Key reasons this meeting is highly consequential:

1. Markets are close to record highs, heightening sensitivity.

2. A rate cut alone may not spark a rally if future guidance is unclear.

3. The 2026 SEP projections will shape institutional positioning for months.

4. Powell’s communication strategy carries heavy influence.

5. A new Fed chair may be appointed soon, adding political weight.

6. Algorithmic models are still recalibrating post-shutdown.

In short, the Fed is about to set the tone not just for December — but for the entire trajectory of 2026.

Santa Rally or Coal? Scenarios Markets Are Pricing In

Scenario 1: Dovish Cut → Strong Rally

• Rate cut delivered

• SEP signals multiple cuts in 2026

• Powell reassures markets

• Stocks break new highs

• Nasdaq leads 5–10% surge

This is the “Santa Claus” outcome.

Scenario 2: Neutral Cut → Choppy Reaction

• Rate cut delivered

• SEP shows only 1–2 cuts in 2026

• Powell warns about inflation risks

Markets may whipsaw, then settle slightly lower.

Scenario 3: Hawkish Tone → Coal for Christmas

• Rate cut delivered

• SEP is conservative

• Powell hints at caution

• Options volatility triggers sell-off

• Tech sector suffers sharp reversal

This is the scenario traders fear most.

What Happens Next?

Once the Fed releases its statement and SEP, the real drama begins:

• Initial algo-driven reaction (0–3 minutes)

• Human-driven interpretation (3–30 minutes)

• Powell press conference volatility (30–60 minutes)

• Options market repricing (post-market)

• Global market response (Asia, Europe next day)

The ripple effects could shape portfolio strategies well into 2026.

Conclusion: A Defining Moment for Year-End Markets

Investors are entering the final stretch of 2025 with a mix of optimism, uncertainty, and anticipation. The upcoming Fed meeting holds the power to buoy markets into a celebratory finish — or cast a shadow over what has been a resilient year.

Whether Wall Street receives record highs or a lump of coal, one thing is certain:

This December FOMC meeting will be remembered as the final market-shaping event of the year.