Market rallied 4 straight days after inflation shocked lower, but Fed’s final 2025 meeting decision coming Wednesday could change everything

The stock market surged after softer-than-expected inflation data highlighted progress in the Fed’s price battle. Investors now zero in on next week’s final Federal Reserve meeting of 2025. This crucial decision could reshape the investment landscape heading into 2026.

Inflation Data Beats Expectations, Creates Rally Catalyst

September’s delayed PCE report finally arrived after government shutdown delays, showing inflation cooling faster than economists anticipated. The Federal Reserve’s preferred inflation gauge came in at 2.8% year-over-year, down from 2.9% in August.

Markets responded immediately with broad gains across tech-heavy Nasdaq Composite rising 0.31% to close at 23,578.13. The data suggested inflation is sufficiently controlled, reducing pressure on the Fed to hold rates steady. Consumer spending also moderated in September, providing additional evidence that price pressures are easing.

This softer reading marks the first decline in core inflation seen after consecutive months at 2.9%, reversing a trend that had worried policymakers throughout 2025.

Market Reaction: Four-Day Win Streak and Positive Momentum Build

The broader market celebrated softer inflation with four consecutive days of gains heading into this week. The S&P 500’s advance to 6,870.40 points represents steady accumulation on the back of easing inflation fears. Dow Jones also finished higher with gains over 100 points, signaling broad-based confidence.

Market Index	Latest Level	Daily Change
S&P 500	6,870.40	+0.19%
Nasdaq Composite	23,578.13	+0.31%
Dow Jones	Higher	+100+ pts
Win Streak	Four days	Consecutive

The four-day win streak reflects investor confidence that the Fed’s interest rate policies are working as intended. Lower inflation means rates may not need to climb higher, supporting equity valuations and reducing borrowing costs for consumers.

Fed’s December 9-10 Meeting: What Wall Street Expects

The Federal Reserve’s final policy meeting of 2025 arrives during this crucial week, with markets fully expecting a 0.25 percentage point rate cut. Current CME FedWatch tool pricing shows 87% probability of a December cut moving the fed funds rate to 3.50%-3.75%.

Fed Chair Jerome Powell has faced intense scrutiny over the past month as markets wavered on cut timing. Recent softer labor data combined with benign inflation readings have solidified the case for action. Economists and Reuters polls confirm widespread expectations for the quarter-point reduction.

The divide within the Federal Reserve over cutting in December remains notable, with some policymakers expressing caution about moving too aggressively. However, the weight of recent economic data appears to have shifted consensus toward the dovish camp.

What Happens After December? Looking Ahead to 2026

If the Fed delivers as expected, the December 2025 cut would mark the third consecutive rate reduction and the final one for this year. Market participants are already contemplating the 2026 outlook, where consensus forecasts additional cuts but at a slower pace.

Goldman Sachs Research projects two additional rate cuts in 2026, leaving the fed funds rate at 3.00%-3.25% by year-end. Other forecasters expect two more cuts in March and September 2026, providing gradual policy support into next year.

This measured approach suggests the Fed believes inflation has sufficiently cooled while avoiding aggressive easing that could reignite price pressures. Investors must weigh potential positives from lower rates against any economic slowdown scenarios.

Will December’s Market Rally Momentum Carry Through the Fed Decision?

The strength displayed in recent trading days suggests positive sentiment heading into the critical December 9-10 meeting announcement. Investor positioning typically becomes cautious when awaiting major Fed decisions, but current enthusiasm indicates confidence in the policy direction.

Several factors could disrupt the rally: hawkish language in Fed communications, stronger-than-expected economic data, or signals about 2026 rate paths could trigger volatility. Additionally, global economic concerns and geopolitical tensions remain backdrop risks.

The key question ahead of Wednesday’s announcement centers on how resilient this rally proves if markets must reassess expectations. Softer inflation data has provided cover for easing, but any surprise policy statements could reshape sentiment quickly.

Sources

• CNBC – Core inflation rate and market rally coverage from December 5, 2025
• Reuters – Fed rate cut expectations and economist polling on December 2025 decision
• Federal Reserve – Official FOMC meeting calendar and policy statements