Fed heads into next meeting light on data, long on caution

A paucity of reliable market data has made the U.S. Federal Reserve’s next rate decision particularly unpredictable, says Siena Sheldon of Brandywine Global Investment Management.

“Earlier this fall, markets were confident in a three-cut path but that view has broken down,” she said. “With the October jobs report cancelled, this gives both the market and the Fed very little to read heading into this meeting. And the data that we do have remains somewhat mixed.”

The Federal Open Market Committee will meet Dec. 9 and 10.

Speaking on the Soundbites podcast this week, Sheldon said some Fed officials have noted early signs of softening in the labour market. But at the same time, there are signs that cash isn’t flowing as easily through the system, as repo rates are trading a bit higher than the Fed’s target, which points to tighter liquidity.

“So with the Fed so divided, it’s a close call,” she said. “But we lean slightly toward a cut.”

She said a small, measured cut now could help ease some of those liquidity pressures and still leave the Fed room to pause policy later on.

“Either way, it’s important to remember that the bigger story here is that the lower terminal rate of around 3% has not changed. It’s just a question of the pace and path of how we get there,” she said.

Sheldon is expecting a “soft patch” in U.S. growth in early 2026, followed by a moderate re-acceleration to growth as some tailwinds kick in.

“In the U.S., you’ve got tax incentives supporting capital spending, credit growth as rates drift lower, and eventually those lower front-end rates feeding through to housing and consumer demand,” she said.

“You also have the AI productivity story. It’s too early to measure, but if even a fraction of that productivity shows up, it extends a cycle, and it supports growth in 2026.”

She said her team is neutral on U.S. Treasury duration, using it more as a ballast and diversifier against credit risk than as any sort of directional bet.

On the credit side, she’s looking for safe names with strong balance sheets, consistent cash flows and short maturities.

“We like shorter-dated high yield for the pull-to-par dynamic and the yield cushion. These bonds give you income without as much rate sensitivity,” she said, adding that the biggest risk for bond investors right now is fiscal risk.

“In the U.S., we’re heading into midterms next year, and it’s hard to imagine any party wanting to tighten spending. That could keep deficits wide and term premiums elevated,” she said.

For investors, it all boils down to focusing on quality.

“Even in this uncertain environment, you don’t need to chase tons of duration or big bets,” she said. “Yields are still high, even if the Fed cuts a few times.”

She said volatility is likely here to stay given the data gaps and political noise.

“But those create opportunity for active investors,” she said. “Our message is really lean into quality carry. Let income drive returns rather than price movement, and potentially use some U.S. Treasury duration as a diversifier or stabilizer.”

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This article is part of the Soundbites program, sponsored by Canada Life. The article was written without sponsor input.