For over a century, the stock market has been the primary engine of wealth creation. While other asset classes like bonds, commodities, and real estate have delivered long-term value appreciation, none can match equities in terms of annualized returns. The year 2025 stands as a testament to investors' patience paying off handsomely. As of December 5, the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite have surged 13%, 17%, and 22% year-to-date, respectively. However, this stellar performance may prove difficult to replicate in 2026.
Among the usual headwinds that could pressure Wall Street indices, one emerging threat stands out—ironically originating from the Federal Reserve, historically a stabilizing force.
The Fed is making history—for all the wrong reasons. Charged with dual mandates of maximum employment and price stability, the central bank rarely operates in an ideal economic environment where unemployment stays historically low while inflation hovers below its 2% target.
Chair Jerome Powell and the 12-member Federal Open Market Committee (FOMC) wield policy tools like federal funds rate adjustments and long-term Treasury operations to steer the economy. Their October 2025 decision to cut rates by 25 basis points to 3.75%-4.00% revealed unusual discord: a 10-2 split vote. Governor Milan dissented, advocating a 50-basis-point cut, while Kansas City Fed President Schmid opposed any reduction—marking only the second time in 35 years that FOMC members lodged opposing objections simultaneously.
This lack of consensus unsettles markets accustomed to Fed predictability. With Powell's term ending in May 2026 amid political tensions over monetary policy, the central bank's traditional stabilizing role is eroding into a risk factor.
Mixed policy signals could ignite stagflation—a nightmare scenario combining stagnant growth with high inflation and unemployment. Powell has downplayed immediate stagflation risks, but the ingredients are coalescing:
- Inflation: The CPI-U jumped from 2.31% to 3.01% year-over-year by September 2025, driven by lingering tariff impacts on imported goods. - Employment: Initial robust job reports for May-June 2025 saw sharp downward revisions, while September's 4.4% unemployment rate marked a four-year high. - Growth: The Philadelphia Fed and Fitch project 2025 GDP growth at 1.9% and 1.8%, respectively—below 2024's 2.8%.
With all stagflation components in place, the 2026 Fed leadership transition—potentially to a Wall Street-skeptical chair—and persistent FOMC divisions may trigger the crisis, setting up a disappointing year for US equities.
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