The Federal Reserve lowered interest rates by a quarter percentage point on Dec. 10, 2025, marking its third cut of the year, and hinted at an additional reduction in 2026. The move brings the benchmark federal funds rate to a range of 3.5% to 3.75% after a closely divided vote among policymakers, as mentioned in Yahoo Finance.

Alan Blinder, former Fed vice chair and Princeton economist, already acknowledged the difficulty of the rate cut call earlier this week, predicted before the meeting’s decision that it could take the shape of a “hawkish cut,” as quoted on Yahoo Finance.

A Split Decision Among Policymakers

The rate cut revealed significant internal disagreement within the central bank. Kansas City Fed President Jeff Schmid and Chicago Fed President Austan Goolsbee argued in favor of keeping rates unchanged, while Fed Governor Stephen Miran pushed for a larger half-point cut. This three-way dissent marks the first time since 2019 that so many officials have opposed a policy action from different angles, as mentioned in Yahoo Finance.

Softened Labor Market, Persistent Inflation Back Rate Cut

The Fed will conclude the year facing a softer labor market and inflation still about one percentage point above its 2% target. During a press conference, Fed Chair Jerome Powell described the situation as “challenging” (as quoted on Yahoo Finance), noting that officials are concerned about inflation and the labor market situation.

Outlook for 2026: Limited Easing Ahead

After three rate cuts in 2025 totaling three-quarters of a percentage point, the Fed’s outlook for 2026 looks more controlled. Policymakers continue to project just one rate cut next year, consistent with their September forecast. Fed Funds rate is projected to be 3.4%, the same as forecast in September. Fed Funds rates are expected to be 3.1% for both 2027 and 2028.

Uptick in GDP Growth Projections

Real GDP is projected to be 2.3% in 2026 (up from 1.8% predicted in September), 2% in 2027 (up from 1.9% projected in September) and 1.9% in 2028 (up from the earlier estimate of 1.8%). Unemployment rate projections are maintained for 2026 at 4.4% while the rate is projected to decline by one percentage point to 4.2% in 2027. The PCE inflation is projected to be 2.5% (down from the earlier estimate of 2.6%).

ETFs to Buy Now

Against this backdrop, below we highlight a few exchange-traded funds (ETFs) that could gain ahead.

Avantis U.S. Small Cap Value ETF (AVUV Quick QuoteAVUV - Free Report)

GDP growth projections have been upped for the U.S. economy. An improving domestic economy bodes well for the pint-sized stocks. Moreover, hawkish tone from the Fed indicates less dovish interest rate policy, going forward. Value stocks perform better in the less dovish policy era.  

Invesco S&P Mid-Cap 400 Pure Value ETF (RFV Quick QuoteRFV - Free Report)

Mid-cap stocks have been in high momentum lately. These stocks offer the best of both worlds – small and large ones. These have exposure to both domestic and international economies. With easing trade tensions, normalizing Fed rate policy and improving cues for the U.S. GDP growth, mid-cap stocks are well-positioned for a rally ahead.

State Street SPDR S&P Bank ETF (KBE Quick QuoteKBE - Free Report)

Bank stocks have been great shape lately. Cheaper valuation, steepening of the yield curve, and solid earnings growth make the case stronger for the bank ETF investing.Credit demand shows signs of improvement despite softness in the labor market.

Pacer US Cash Cows 100 ETF (COWZ Quick QuoteCOWZ - Free Report)

“Cash-cow investing” means focusing on companies that generate high free cash flow yields. In a shaky economic condition, such cash-rich companies tend to weather the risks efficiently. Cash-rich companies rely less on borrowing. Hence, they are better-positioned in a tighter credit market.