In December 2025, the Federal Reserve cut interest rates by another 25 basis points (0.25%), lowering the federal funds target range to 3.50% – 3.70%, its lowest level since 2022. This marked the third rate cut of 2025, signaling a clear shift toward monetary easing amid ongoing economic uncertainties. Yet despite this pivot, the stock market is hovering near all-time highs, residential property values continue to climb, and gold keeps breaking record levels. In this blog, I will explore the complex economic forces shaping today’s landscape, with a particular focus on the growing divide between different groups within the economy.
To start, the Federal Reserve lowered the federal funds rate to a range of 3.50% – 3.75% in December. The Fed operates under a dual mandate in the U.S. economy: keeping inflation under control while maintaining full employment. Its inflation target is 2%, and full employment is defined as the maximum level of employment that can be sustained without pushing inflation above that target. For practical measurement, this generally corresponds to an unemployment rate in the range of 3.5% – 4.5%. Inflation currently sits at 2.7% and the unemployment rate sits at 4.6%.
Current economic conditions are often described by economists as a “K-shaped economy”. Meaning different groups within the U.S. economy are moving in opposite directions at the same time, with some experiencing gains while others fall behind. The term gained popularity after the pandemic, as asset-owning and higher-net-worth households recovered faster from post-pandemic economic conditions marked by high inflation. While lower-income and non-asset-owning households have continued to struggle.
During the pandemic, the Federal Reserve increased the money supply (M2) by roughly $6 trillion, expanding the amount of money in the economy by about 40%. This unprecedented action was one of the key contributors to the surge in inflation that followed. M2 is a broad measure of the money supply that captures the total amount of money circulating throughout the economy. It includes cash, funds held in checking and savings accounts, and other deposit accounts that can be quickly converted into cash. This ease and speed of conversion is known as liquidity. A 40% increase in such a short time frame is historically unusual. As shown in the graph below, the M2 money supply experienced an exponential jump.
With all of this “new” money flowing into the economy, it had to go somewhere. So, where did it go? Into financial assets such as stocks, real estate, and gold, all of which are near all-time highs. This underscores how asset-owning, high-net-worth households have continued to thrive and, in turn, help prop up the U.S. economy. One important detail often overlooked in discussions about the money supply is how that money is actually being used. While the M2 money supply measures the total amount of money currently in the system, the velocity of M2 captures the speed at which that money circulates through the economy. In other words, it reflects how many times each dollar is used to purchase final goods and services, thereby contributing to GDP. A high velocity of money indicates that dollars are changing hands frequently, while a low velocity suggests that money is sitting idle in savings or investments. Purchases of assets such as stocks, gold, or existing homes do not directly raise GDP, as these transactions are primarily asset transfers rather than purchases of final goods and services. As shown in the chart below, the velocity of M2 dropped sharply during the pandemic and has only partially recovered, remaining well below the historical levels previously seen in the U.S. economy.
A year ago, I wrote a blog titled “Why are mortgage rates staying stubbornly high?”. Since then, national 30-year fixed mortgage rates have remained in the 6.00% – 6.50% range. Despite recent Federal Reserve rate cuts, as the 10-year treasury still remains above 4.00%. As I explained in the previous blog, mortgage rates don’t directly follow the federal funds rate. Instead, banks use the 10-year treasury yield as their benchmark to set mortgage rates. As shown in the chart below, the 10-year yield has remained range-bound between 4.00% and 5.00% over the last 14 months, with no clear trend in either direction.
There are many variables at play when analyzing the current housing market amid today’s economic conditions. However, the core issue remains a significant housing supply shortage. Both Redfin and recent estimates from JPMorgan suggest that the U.S. is facing a shortage of approximately 2.8 to 5 million homes. This shortage has been further intensified by the recent surge of “new” money flowing into the economy. Much of this money has flowed into financial assets like real estate. This disproportionately benefits asset-owning households, who see the value of their homes rise. Historically, U.S. home prices have appreciated at an average annual rate of 3-5% since 1967; however, during the pandemic, prices rose much more rapidly, with some areas seeing increases of 40-50% over just five years. The U.S. economy and consumers are still adjusting to these sharp increases, which have occurred over a relatively short period and are well above historical norms. The graph below illustrates how U.S. national home prices, dating back to 1987, have been affected throughout the years in the economy.
Despite the challenges of acquiring assets in today’s market, the solution is not to stop trying. Our financial system rewards participation, whether in the stock market, real estate, or other investment opportunities. The sooner you begin to engage, the sooner you can benefit from the wealth effects that come from investing. As a financial advisor, I help older generations support their children and grandchildren in getting a strong financial start. In times like these, accumulated wealth can be leveraged to make accelerated gifts to family members or charitable organizations. Gifting during your lifetime is a powerful strategy, whether it’s assisting with a first-time home down payment or jump-starting a 529 education account. Working with a qualified advisor can help coordinate these strategies effectively and ensure you take full advantage of favorable market conditions.
Sources:
https://www.stlouisfed.org/on-the-economy/2022/january/have-fed-asset-purchases-reshaped-bank-balance-sheets-part-1
https://www.richmondfed.org/publications/research/econ_focus/2022/q3_federal_reserve
https://privatebank.jpmorgan.com/nam/en/insights/markets-and-investing/tmt/a-shortage-of-supply-the-housing-market-explained
https://www.redfin.com/blog/average-home-appreciation-per year/#:~:text=On%20average%2C%20homes%20in%20the,due%20to%20a%20recent%20surge