Is the Fed’s rate-cutting cycle winding down?

Key takeaways

• U.S. Fed cuts rates, signals potential pause
• Focus shifts to AI monetization
• Australian bond yields surge 

On Wednesday, the U.S. Federal Reserve (Fed) delivered a widely anticipated 25-basis-point rate cut at its final meeting of the year. In the press conference that followed, Chair Jerome Powell emphasized that monetary policy is now much closer to neutral and that the central bank is likely nearing the end of its rate-cutting cycle. He also made it clear that rate hikes are not under consideration.

These remarks dovetail with the macro environment we expect in the year ahead, as outlined in our recently published 2026 Global Market Outlook. We anticipate a resilient U.S. economy supported by ongoing AI-driven investment, productivity gains from broader AI adoption, and fiscal momentum from the One Big Beautiful Bill. Market reaction to the Fed’s decision was relatively muted, with equities inching higher and bond yields drifting modestly lower.

Meanwhile, the latest data continued to point to a largely unchanged U.S. labor market. The delayed October JOLTS report showed a small increase in job openings, for instance, while real-time indicators such as Indeed postings remained steady. Together, these measures suggest the U.S. job market is still in a “low hire, low fire” environment, with little sign of renewed momentum or meaningful deterioration.

Recently released earnings reports from Oracle and Broadcom provided useful perspective on how AI-related spending is progressing. Both companies are key suppliers of the infrastructure that supports AI development, which makes their results an early gauge of how the investment cycle is unfolding.

Oracle reported capital expenditures that were well above expectations, and guidance for future investment also moved higher. Revenue, however, was a little softer. That combination is important as we look ahead to 2026. Markets have spent much of the past year rewarding companies for large AI-related investments, but softer revenue at Oracle underscores the next phase of the conversation, which will likely focus more on how these investments translate into actual earnings.

Broadcom delivered a modest earnings beat, with shares rising about 3.5% in after-hours trading. The combined picture from both companies points to an AI spending cycle that remains active but uneven. Markets are still evaluating not just how much companies are investing, but how quickly that investment might translate into revenue in the year ahead.

In Australia, government bond yields have risen sharply over the past two months, widening the spread between Australian 10-year bonds and U.S. Treasuries to roughly 60 basis points—near decade highs.

The recent rise in yields reflects, in part, market expectations that the Reserve Bank of Australia (RBA) could deliver two rate hikes in 2026. We see this as unlikely. In our opinion, several recent inflation readings have been distorted by temporary policy effects—particularly in electricity and water prices—making it difficult to gauge the underlying trend and contributing to an overestimation of inflation persistence.

Data released this week showed no meaningful pickup in hiring or wage growth, reinforcing our view that while one RBA rate hike cannot be ruled out next year, two hikes are unlikely. With yields now considerably higher, we see Australian government bonds as relatively attractive.