Podcast Summary: Forecasting the Fed’s Forecasts

Podcast: Notes on the Week Ahead
Host: Dr. David Kelly
Date: December 8, 2025

Episode Overview

In this episode, Dr. David Kelly, Chief Global Strategist at J.P. Morgan Asset Management, examines the upcoming Federal Reserve (Fed) FOMC meeting and the potential implications for monetary policy, economic growth, unemployment, and inflation. He reviews market expectations for a December rate cut, explores the factors dividing Fed officials, and dissects the Fed’s forthcoming Summary of Economic Projections (SEP). Dr. Kelly also provides an outlook on the economy for 2026-2027 and details likely impacts on markets and investors.

Key Discussion Points and Insights

Swings in Rate Cut Expectations and Fed Communications

• Market Odds Fluctuate:
  • In the wake of the last FOMC meeting, market expectations for a December rate cut swung from 73% (Oct 30) to 30% (Nov 19), influenced by hawkish statements from Fed officials.
  • Intervention from Fed leadership, especially NY Fed President John Williams’ balanced speech, bumped the probability back to 86% by early December.
• Quote:
  • “Fed leadership appeared to intervene… New York Fed President John Williams...concluded by stating that ‘I see room for a further adjustment in the near term to the target range for the federal funds rate to move the stance of policy closer to the range of neutral.’” (Dr. Kelly, 02:00)

Divisions Within the Fed

• Not Political, But Forecast-Based:
  • While political pressures for cuts exist, Dr. Kelly emphasizes that, “the real division within the Fed is not one of politics, but rather forecasts, as they all try to discern the path forward in a particularly foggy economic landscape.” (Dr. Kelly, 03:30)

Economic Growth Outlook

• Recent Data and Projections:
  • Q3 2025: Estimated real GDP growth was ~2.5% annualized.
  • Q4 expected near 0% growth due to a slowdown in consumer spending, weak vehicle sales, tariff effects, and the federal shutdown.
  • Full-year 2025: Around 1.4% growth; ramping up to 3% in 1H 2026 (tax refunds, wealth effects), then slowing to 1% in 2H 2026—averaging 2% by year-end.
  • Long-term risks: “A sharp decline in immigration will likely mean that the working age population is now falling… overall real GDP growth could slow to just 1.5% in 2027.” (Dr. Kelly, 07:10)
• Expectations Around SEP:
  • Fed likely to leave its longer-term growth forecasts largely unchanged.
  • “We expect to see very little change in these numbers on Wednesday.” (Dr. Kelly, 09:30)

Unemployment Trends and Uncertainties

• Current Data:
  • Labor market data is “very confusing” with soft job growth (39,000 avg./month in prior 5 months).
  • Expected dip in Q4 due to government layoffs.
  • Trend toward a “low hire, low fire economy” as employers face persistent labor shortages.
  • Unemployment crept up from 4.1% to 4.4% year-over-year — expected to average 4.5% in Q4, stabilize, and then drift back toward 4% in late 2026.
• Quote:
  • “We increasingly appear to be in a low hire, low fire economy as employers grapple with a chronic shortage of qualified workers for many positions.” (Dr. Kelly, 12:00)
• Fed Projections:
  • Fed's SEP expected to show slow declines in unemployment, justifying further easing.

Inflation: Mixed Trends and 2026 Outlook

• Recent Inflation:
  • YoY CPI moved from 2.3% in April to 3.0% in September; tariff increases and energy prices boosting core goods prices.
  • But: “Elsewhere, inflation trends are generally benign. The price of a gallon of Regular gasoline has now fallen below $3 nationwide…” (Dr. Kelly, 18:00)
• Short-Term vs. Long-Term Projections:
  • Q4 2025: CPI up to 3.4%, Consumption deflator at 3.1%.
  • First half 2026: Inflation rises further as tax refunds boost demand.
  • Second half of 2026: Inflation subsides, with CPI just over 2% and consumption inflation falling below 1.9%.
  • 2027: “Consumption deflation inflation could well remain below 2%.”
• Fed SEP Projections:
  • “We expect that they will cut the projection of inflation for the end of next year, a crucial step in justifying further easing.” (Dr. Kelly, 21:40)

Policy Implications and Market Impact

• Multiple Dissents Expected:
  • Likely a 25 basis point rate cut, but possibly three or four FOMC dissents.
  • If so: “Multiple descents could represent a hawkish surprise, potentially boosting the short end of the yield curve and the dollar, but potentially hurting stock prices...” (Dr. Kelly, 27:40)
• Further Easing:
  • Unlikely until at least March unless economic growth disappoints.
  • “We expect at least one rate cut at the end of 2026 in recognition of inflation finally falling below the Fed's 2% target after exceeding it for more than five years.” (Dr. Kelly, 29:30)

Notable Quotes & Memorable Moments

• On the Fed’s Internal Disagreement (03:30):

  • “The real division within the Fed is not one of politics, but rather forecasts, as they all try to discern the path forward in a particularly foggy economic landscape.”

• On Job Market Dynamics (12:00):

  • “We increasingly appear to be in a low hire, low fire economy as employers grapple with a chronic shortage of qualified workers for many positions.”

• On Inflation and Its Drivers (18:00):

  • “Elsewhere inflation trends are generally benign. The price of a gallon of Regular gasoline has now fallen below $3 nationwide...”

• On the Outlook for Further Easing (29:30):

  • “We expect at least one rate cut at the end of 2026 in recognition of inflation finally falling below the Fed's 2% target after exceeding it for more than five years.”

Important Timestamps

• 00:45 – Wild swings in December rate cut odds, key speeches that swayed markets.
• 02:00 – John Williams signals room for adjustment, markets respond.
• 03:30 – Dr. Kelly on the Fed’s real division: forecasts, not politics.
• 07:10 – Economic growth risks: declining working age population.
• 09:30 – Minimal changes expected in the Fed’s long-term growth outlook.
• 12:00 – Labor market: “low hire, low fire” and chronic labor shortages.
• 16:50 – Unemployment rate trajectory through 2027.
• 18:00 – Mixed picture on inflation; benign trends outside energy and core goods.
• 21:40 – Likelihood of lowering inflation forecasts to justify easing.
• 27:40 – Market impacts of dissent at the FOMC meeting.
• 29:30 – Outlook for further rate cuts and reasons for delayed action.

Closing Note

Dr. Kelly concludes by cautioning investors to watch for potential surprises from the number of dissenting Fed members, and to look ahead to further data-dependent policy moves in 2026 and beyond.