Santa SARB delivers festive cheer

As the year draws to a close, many of us are reflecting on our achievements in 2025 and looking forward to a well-deserved break.

Central bankers are people too — and no doubt looking forward to some rest and a chance to unwind. However, while everyone has been busy, not everyone will end the year feeling satisfied.

This is particularly true of the US Federal Reserve, the most important of all central banks. It kept policy rates on hold for most of this year but made cuts in September and October. Over the course of 2025, it has faced four distinct challenges.

A challenging year
Firstly, it has been difficult to interpret the conflicting signals on where the US economy is headed, particularly the two components of the Fed’s mandate: unemployment and the inflation rate. Secondly, being starved of data to do its job due to the US government shutdown was challenging. Thirdly, facing the prospect of internal dissent and political interference as the race to succeed Chair Jerome Powell heats up. Finally, navigating all of this in a market environment where there has been considerable froth in some pockets and emerging cracks in others.

Of the four, at least the shutdown-induced data drought is coming to an end. However, given that fieldwork was disrupted in October and November, official statistics will probably only be trustworthy by December. On politics and succession, there isn’t much to add, except to say that a round of speeches by top Fed officials over the past two weeks suggest the upcoming December FOMC meeting could see three dissenting votes, the most in recent years. Minutes from the October FOMC meeting released last week referred to “strongly differing views” over the path of rates in the near term.

In terms of the first problem, the waters are muddy. Inflation is above target, but some of the underlying gauges are easing, such as rental inflation. Tariff-induced inflation is likely to become less pressing given the most recent round of trade deals and exemptions for food items. Still, it is not a given that there won’t be spillovers from tariffs to other items, in other words, companies may use tariffs as an excuse to raise unrelated prices. The Fed has rarely cut interest rates with inflation so far away from its target, but it did exactly that at the September and October meetings of the Federal Open Markets Committee. Its preferred inflation measure, the core personal consumption deflator, was at 2.9% year-on-year, well above the 2% target.

On the labour market, there have been high-profile layoff announcements, but not enough to show up in the weekly unemployment insurance claims data yet. These numbers were unaffected by the shutdown since it is collected by the states, not federal agencies. Other labour market indicators tell a mixed story of some weakening but no major red flags. Delayed employment data released last week showed that 119,000 jobs were added in September, more than expected, but previous months were revised down. The unemployment rate ticked up a bit to 4.4%, low by historic standards, but the highest since 2021. It is the modest upward trend in unemployment that the Fed would want to stop, though with underlying economic growth still resilient, it is not clear that unemployment will continue rising.

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