The Fed's Pretend Game: Watching Powell Navigate the Impossible

The Federal Reserve just did something remarkable on December 10th: it cut interest rates while inflation sits at 2.8%—well above its 2% target—and a labor market that's supposedly weakening enough to justify monetary easing. Three dissenting votes. One of them asking for an even larger cut. Another saying don't cut at all. A central bank that looks less like an institution with a coherent framework and more like a restaurant trying to serve every diet at once.

Here's the thing nobody wants to say out loud: we're watching a central bank perform consensus theater while the economy sends genuinely confused signals.

The Numbers Say What's Actually Happening

Inflation has moved up since earlier in the year and remains somewhat elevated. That's not me editorializing—that's the Fed's own language from their December statement. Inflation at 2.8% in September. That's the month they had actual data for. The unemployment rate edged up to 4.4%, but job gains have slowed this year.

So we're cutting rates into a scenario where: inflation is rising, the labor market is deteriorating but not catastrophically, and uncertainty is "elevated." The Fed then projects just one more quarter-point cut in all of 2026. One. After three cuts to close out 2025.

That's not a cutting cycle. That's a pause pretending it's still in motion.

When the language was used in December 2024, it signaled that the committee likely was done cutting for the time being. The FOMC then did not approve any reductions until the September 2025 meeting. So Powell's careful post-meeting phrasing—"we are well positioned to wait to see how the economy evolves"—might actually mean something. It might mean the rate cut regime just ended. This could be the last one.

The Market Figured It Out First

While Powell was threading his rhetorical needle on Wednesday afternoon, the bond market was already moving. The stock market was also broadly feeling pressure from the bond market, where the yield on the 10-year Treasury climbed to 4.19% from 4.14% late Thursday. That's not a typo—yields went up after a rate cut. Longer-dated yields kept climbing because traders were processing the real message: no more cuts coming.

By Friday, the divergence became carnage. U.S. equities pulled back on Friday as investors continued to exit technology stocks and move into value areas of the market. The S&P 500 fell 1.07% to end the day at 6,827.41, and the Nasdaq Composite declined 1.69% to 23,195.17.

Broadcom down 11% on Friday. Oracle down 13% on Thursday after guidance miss. The two stocks at the epicenter of everyone's AI infrastructure bets, imploding in real time. A disappointing sales outlook from Broadcom Inc. sent the chipmaker tumbling 11% and weighed on rivals, further fueling investor anxiety over AI wagers initially prompted by Oracle Corp.

The pattern here should terrify anyone who believed the AI narrative unconditionally. When the economic environment shifts from "rates will be cut forever" to "we're done cutting," suddenly all those capital expenditure plans look a lot less attractive. Oracle announced data center delays stretching into 2027. Broadcom warned on margins. The entire infrastructure-as-destiny thesis got a hard reset in 48 hours.

What the Dissents Actually Tell Us

With inflation remaining stubbornly high, it was not a slam dunk decision. Three votes against: Goolsbee and Schmid voting to hold steady, Miran voting for a half-point cut instead of a quarter-point.

That's not normal discord. It was the first time in six years that an interest rate vote was so divided. Miran, who was installed by the Trump administration in September as a white house economic adviser, has voted for larger cuts at every meeting. He's not representing a serious alternative policy framework—he's representing political pressure. And it's working. Two regional Fed presidents choosing to hold steady suggests a real ideological fracture about whether inflation matters at all.

Meanwhile, Powell's legacy is being written in real time. His final few meetings at the Fed chair are happening against a committee that doesn't fully trust each other's judgment. President Trump has been demanding that the central bank cut rates more aggressively, even though the Fed is designed to be insulated from political pressure. When Trump installs board members specifically to push the chair to do more cutting, and inflation is rising, the central bank stops looking like an independent institution and starts looking like political theater with good marketing.

What Disney's $1 Billion Sora Deal Really Means

Buried in the market churn on December 11 was something worth attention: The Walt Disney Company has struck a $1 billion deal to license its content to Chat-GPT maker OpenAI, a first-of-its-kind deal that could help the artificial intelligence firm gain a significant edge over its competitors as the pressure to secure content to feed AI-powered applications mounts.

This is the economy's real infrastructure now. Not data centers that might not be finished until 2027. Not chip capacity for GPUs that can't be monetized fast enough. But IP licensing agreements that let foundation models train on decades of Hollywood content for three years.

The Disney deal doesn't generate returns for three years. Neither does anyone's data center. Neither does anyone's model. But the fed funds rate is now at 3.5-3.75%. The 10-year Treasury is at 4.19%. The cost of capital just became real. For the first time in the AI boom, users have to contemplate whether the return on a $50 billion data center is worth the financial engineering required to justify it.

Broadcom and Oracle aren't falling because the AI boom ended. They're falling because the Fed finally admitted—through action, if not words—that the AI boom needs to make money now, not eventually.

The Jobless Claims Signal Nobody's Talking About

On December 12, Initial jobless claims spiked last week, reversing an unexpected drip from the Thanksgiving holiday, the Labor Department reported Thursday. Filings for unemployment benefits totaled a seasonally adjusted 236,000 for the week ended Dec. 6, up 44,000 from the previous week's upwardly revised level and above the Dow Jones consensus estimate for 223,000.

The Fed justified three rate cuts this year on a weakening labor market. Well, here it is. Claims went up 44,000 in one week. Multiple states saw large post-holiday spikes. This isn't rounding error—this is a signal that the labor market stabilization the Fed paid for through forward guidance and rate cuts is maybe not actually happening the way Powell hoped.

The Dow finished down Thursday but managed to stay ahead for the week—driven by profit-taking from the tech selloff and rotation into financials. Goldman Sachs was up 5% for the week. That's what "well-positioned to wait" actually looks like: a bifurcated market where the big banks profit from volatility while the infrastructure bets get repriced lower.

The Neutral Rate Myth

Powell kept using the phrase "the fed funds rate is now within a broad range of estimates of its neutral value." Neutral. As if there's a scientific neutral rate and not a politically contested assumption disguised as empirics.

Neutral at 3.5% only makes sense if you believe: inflation is temporary, the labor market stabilizes without more cuts, and capital allocation in the real economy is efficient enough to generate returns on infrastructure investments at mid-single-digit real rates.

What if you're wrong about any of those three? What if inflation is structural, layered into supply chains and geopolitical realities? What if the labor market keeps softening? What if capital gets destroyed on data centers that don't generate revenue for years?

Then neutral isn't neutral—it's a starting point for the next cutting cycle.

What Comes Next

The markets are pricing one rate cut in all of 2026. Maybe two. The Fed's own dot plot shows one. But here's the thing: that forecast was made before this week's jobless claims data, before Broadcom's margin warning, before Oracle's timeline slip.

Powell is betting that the economy normalizes. That inflation reverts to 2%. That employment stabilizes at a healthy level. That the Fed's three cuts this year were exactly right—neither too many nor too few.

The Nasdaq down 1.7% for the week, with the Dow up 1% suggests the market is pricing in something different. The market is pricing in a bifurcated economy where financial assets get repriced lower, essential stocks hold up, and the Fed's next move is probably down, not sideways.

Powell said he wants to hand the next chair "an economy in really good shape." That means inflation under control, strong labor market. But that requires the data to cooperate, inflation to behave, and the AI capex cycle to generate enough returns to justify itself.

After this week, none of those look like certainties.