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What The Fed's Rate Cuts Really Mean For The Economy
The Macro Institute's Weekly Economic Primer
The Macro Institute
December 29, 2025
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Don’t have time to watch the whole video? Here’s 5 Key Takeaways:
🔹 Interest Rates Leads Economic Activity With Long Lag: It generally takes ~18 months before for the economy to start to feel the impact of changes in interest rates. The fed starting cutting rates 15 months ago.
🔹 Housing Is The Initial Mechanism Of Economic Impact: When rates fall, potential homebuyers start looking for homes. Researching, visiting homes, making offers, getting a mortgage, and moving takes time.
🔹 Homebuyers Spend More Than Non-Homebuyers: Homebuyers typically spend an extra ~$5,000 in the year they purchase a home compared to non-homebuyers. This spending is largely from appliances, furniture, repairs, and alterations.
🔹 Everything Starts With Monetary Policy: The Federal Reserve sets the fed funds rate, and interest rates can be used interchangeably for forecasting purposes since they generally trend in the same direction.
🔹 Interest Rates Are The Premier Forecasting Tool: The part of interest rates lays the foundation for future trends in LEIs (including the S&P 500!). Their ability to give a heads up on the business cycle makes them an invaluable tool for macro forecasters.
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The Macro Week Ahead
📆 Last Week’s Data Key Takeaways
🔹 Firm Growth Momentum: Q3 GDP printed 4.3% (well above consensus), though it reflects earlier-quarter strength, delayed reporting, and increasing health care costs.
🔹 Manufacturing Remains Soft: Industrial production rose modestly, but factory output was flat and regional surveys (e.g., Richmond) remain in contraction territory.
🔹 Consumer Caution Continues: Confidence fell to 89.1, and expectations stayed at levels historically associated with elevated recession risk.
🔹 A “No Fire, No Hire” Labor Market: Initial claims suggest low layoffs (214k), but continuing claims rose, pointing to slower re-employment/hiring.
🔹 Business Capex Signals Mixed: Headline durable goods were weak (-2.2%), but the core capex proxy rose (+0.5%) and shipments improved (+0.7%).
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