Higher Interest Rates
In our final market update of 2025, we explore the theme of “Longer for Longer,” analyzing why interest rates are establishing a new, elevated baseline. Despite the Federal Reserve’s recent cut bringing the overnight rate to a range of 3.50%–3.75%, Chair Powell’s “wait and see” approach suggests that the era of aggressive easing is over. While the market optimistically prices in two to three cuts for 2026, Fed projections indicate only a single reduction, signaling a disconnect that investors must navigate. Crucially, the “neutral rate” is now estimated around 3%, suggesting that the near-zero rates of the post-2008 era were emergency anomalies rather than the standard we are returning to.
Higher Inflation
Inflation remains persistently “sticky,” hovering at 2.7% as of November, with the Fed not expecting to reach its 2% target until 2028. The core drivers—services and housing—continue to exert upward pressure, with services inflation running at approximately 3.5% due to domestic labor costs that cannot be offshored. Housing, comprising over a third of the CPI basket, remains elevated at 3%, leading many economists to posit that 3% inflation may be the “new normal.” Structural shifts, including the onshoring of manufacturing and an aging demographic, are likely to keep price floors higher than the previous decade’s average, challenging the feasibility of a quick return to 2% inflation.
Tariffs & Trade Policy
Perhaps the most dramatic shift in 2025 is the explosion in tariff revenue, which has surged 253% year-over-year to $195 billion, reaching levels unseen since the 1930s. With average tariff rates climbing to 17.9%, trade policy has evolved into a significant federal revenue stream, now accounting for 3.5% of total government receipts. While these tariffs on sectors like Chinese EVs and semiconductors act as a tax on imports and fuel inflation, their contribution to the federal budget makes them unlikely to be rolled back significantly. For investors, this confirms that higher import costs and a more protectionist trade environment are structural realities that will influence corporate profits and market volatility well into 2026.
If you have questions about how this December 2025 market update impacts your personal financial plan, please contact our team to discuss your portfolio positioning.