Middle Market Debt Weekly: Fed’s Divided December Cut and Cannabis Rescheduling Set the Tone for 2026 Middle Market Lending

Divided Federal Reserve delivers final rate cut of 2025 as cannabis rescheduling sparks regulatory optimism

The week ending December 14, 2025, brought the Federal Reserve’s most contentious interest rate decision of the year, as a divided Federal Open Market Committee delivered its third consecutive quarter-point cut amid sharp disagreement over the appropriate policy stance. The 9-3 vote to lower the federal funds rate to 3.50%-3.75% marked the most dissents since September 2019, with three officials breaking ranks—two favoring no cut at all while one pushed for a larger half-point reduction.¹ The division underscored the tension between labor market concerns and persistent inflation worries that continues to complicate the Fed’s path forward.

Meanwhile, the Trump administration’s expected executive order to reclassify marijuana from Schedule I to Schedule III triggered the largest single-day rally in cannabis stocks in years, with Tilray Brands surging 44% and Canopy Growth jumping 52% on Friday.² The potential regulatory shift, which could eliminate punitive tax treatment under Internal Revenue Code Section 280E, signals broader deregulatory momentum that middle market lenders are watching closely across multiple sectors.

Federal Reserve Signals Extended Pause After Contentious December Decision

Chair Jerome Powell characterized the December decision as a “close call,” acknowledging that “I could make a case for either side.”³ Chicago Fed President Austan Goolsbee and Kansas City Fed President Jeffrey Schmid voted against the cut, preferring to hold rates steady, while Governor Stephen Miran dissented in favor of a larger 50-basis-point reduction.⁴ The unusual breadth of disagreement extended beyond voting members, with four additional participants registering “soft dissents” indicating they would not have supported the cut—meaning six of nineteen meeting participants opposed the action.

The updated dot plot revealed expectations for just one additional rate cut in 2026 and another in 2027, a notably hawkish signal that tempered initial market enthusiasm.⁵ Powell emphasized the Fed is now “well positioned to wait and see how the economy evolves,” with the federal funds rate approaching estimates of neutral policy. The Committee also announced it would resume purchasing Treasury securities, starting with $40 billion in Treasury bills on Friday, to maintain ample reserves in the banking system.⁶

For middle market borrowers, the December cut brings the total easing since September 2024 to 175 basis points, providing meaningful relief for floating-rate debt burdens. However, the Fed’s cautious forward guidance suggests further cuts will require deteriorating labor market data. Market pricing now assigns a 75.6% probability of no change at the January meeting, up from 53% just one month ago.⁷

Equity Markets Digest Rate Decision Amid Tech Sector Rotation

Financial markets responded positively to the Fed’s decision on Wednesday, with the Dow Jones Industrial Average climbing 497 points to close at 48,058, while the S&P 500 added 0.7% to 6,887.⁸ Treasury yields fell across the curve, with the 10-year declining more than 3 basis points to 4.153% and the 2-year dropping more than 7 basis points to 3.542%—reflecting stronger demand for government debt following the Fed’s dovish tone on labor market risks.⁹

The rally extended into Thursday, with the Dow reaching a fresh all-time intraday high and adding another 646 points to close at 48,704.¹⁰ Financial and industrial stocks led the advance, with the Financials Select Sector SPDR gaining 1.8% and Materials adding 2.2%. However, technology stocks diverged sharply as Oracle Corporation plunged 13% following disappointing fiscal second-quarter revenue that missed analyst expectations.¹¹

Friday brought profit-taking across technology names, with the S&P 500 falling 1.07% to 6,827 and the Nasdaq Composite declining 1.69% to 23,195.¹² Broadcom shares dropped more than 11% despite beating fourth-quarter expectations, as investors digested margin compression concerns and questioned the timeline for AI-related revenue payoffs.¹³ The rotation from growth to value stocks intensified, with the Dow limiting its decline to 0.51% while small-cap Russell 2000 dropped 1.51% after hitting its own intraday all-time high.

Asset-Based Lending Activity Continues Despite Year-End Slowdown

TAB Bank closed a $15 million asset-based lending facility for Gehr Industries on December 11, supporting the electrical wire and cable distributor’s growth initiatives.¹⁴ Founded in 1965 and headquartered in Commerce, California, Gehr Industries serves diverse end markets including construction, AV, data centers, and disaster response. The transaction demonstrates continued lender appetite for established middle market companies with strong asset bases.

Earlier in the week, FGI Finance provided a $65 million multi-jurisdictional facility to A2 Global, a Wynnchurch Capital portfolio company and leading electronic component distributor.¹⁵ The facility offers advances on accounts receivable, inventory, and machinery and equipment across six jurisdictions: the United States, Germany, Singapore, Japan, the United Kingdom, and the Netherlands. The cross-border structure reflects growing sophistication in asset-based lending as middle market companies expand internationally.

O2 Sponsor Finance, a division of Old Second National Bank, served as Administrative Agent and Co-Lead Arranger for senior secured credit facilities supporting Paceline Equity Partners and Serata Capital Partners in their acquisition of EventLink Group.¹⁶ The Michigan-based experiential marketing company serves Fortune 500 clients across automotive, government, and entertainment sectors.

Private Credit Markets Show Late-Cycle Softening Signs

KBRA’s third-quarter BDC Ratings Compendium, released December 5, highlighted emerging signs of late-cycle softening across the rated BDC universe, with non-accrual investments rising to a median of 2.5% of total investments at cost compared to lower levels in prior quarters.¹⁷ While the rating agency noted that the vast majority of internal risk ratings remain in categories reflecting performance at or above expectations (93.7%), dispersion widened across platforms—reflecting idiosyncratic pressures and selective borrower underperformance.

The broader operating environment remains characterized by tight spreads, with direct lending new issuance spreads compressing to approximately SOFR plus 450 basis points, down from SOFR plus 500 earlier in the year.¹⁸ The 50-basis-point compression reflects intense competition for limited deal flow as M&A activity remains below expectations. Nearly half of new issuances now price below 500 basis points spread, narrowing the gap between private credit and broadly syndicated loan pricing to just 50-100 basis points.

Several BDCs adjusted dividend strategies during the week in response to declining base rates and tighter spreads. Trinity Capital announced a $15 million growth capital commitment to Kard Financial, a commerce media network serving fintechs and financial institutions.¹⁹ The investment demonstrates continued deployment into technology-enabled business services despite broader caution around venture lending exposures.

Cannabis Rescheduling Signals Broader Deregulatory Momentum

Reports that President Trump plans to issue an executive order reclassifying marijuana from Schedule I to Schedule III triggered explosive gains in cannabis stocks. The Amplify Seymour Cannabis ETF rallied more than 54%—its best day on record—while major operators saw their shares roughly double in value.²⁰ The potential rescheduling would place marijuana alongside Schedule III substances like ketamine and anabolic steroids, eliminating the punitive 280E tax provision that has prevented cannabis companies from taking standard business deductions.

For middle market lenders, the regulatory shift could unlock significant new opportunities in cannabis-related financing. As Compass Point analyst Ed Groshans noted, rescheduling would be “positive for the cannabis industry, allowing banks to serve the sector” more directly.²¹ Current restrictions have limited most cannabis financing to specialty lenders and equipment lessors, but Schedule III status could open traditional ABL and private credit channels for working capital and acquisition financing.

The broader deregulatory thrust extends beyond cannabis. Treasury Secretary Scott Bessent proposed changing the Financial Stability Oversight Council’s approach from tightening regulations toward looser oversight and a “freer approach” to financial services.²² The shift could benefit alternative lenders and non-bank financial institutions that have gained market share from traditional banks under more restrictive regulatory frameworks.

Labor Market Data Remains Clouded by Shutdown Effects

Economic data continues to arrive with significant delays following the government shutdown that ended in mid-November. Initial jobless claims spiked to 236,000 for the week ended December 6, up 44,000 from the prior week and above consensus estimates.²³ Multiple states saw large increases following the holiday period, including California (14,499), Illinois (11,207), and New York (10,600). Continuing claims fell sharply by 99,000 to 1.84 million, though this figure was above the 1.93 million estimate.

The Federal Reserve acknowledged that the data void complicated its December decision. Fed Governor Michael Barr noted that the FOMC’s task was “made more challenging” by shutdown-related delays, forcing policymakers to rely more heavily on private sector surveys and alternative indicators.²⁴ The November employment report and Consumer Price Index—both critical inputs for monetary policy—remain unavailable, with CPI scheduled for release on December 18.²⁵

Items to Consider for Market Participants

Evaluate Floating-Rate Exposure in Light of Extended Pause. With the Fed signaling a prolonged hold at current levels, middle market borrowers carrying floating-rate debt may benefit from locking in current rates through hedging instruments. The 175 basis points of cumulative easing since September 2024 has provided meaningful relief, but further cuts appear unlikely without labor market deterioration.

Monitor Regulatory Shifts Across Multiple Sectors. The cannabis rescheduling represents the most visible example of broader deregulatory momentum that could affect lending opportunities in healthcare, financial services, and other regulated industries. Market participants positioned to deploy capital as regulatory barriers fall may find attractive risk-adjusted returns.

Prepare for Compressed Spreads Through Credit Selectivity. With direct lending spreads tightening to SOFR plus 450 basis points, maintaining returns requires enhanced focus on credit quality and operational due diligence. The widening dispersion in BDC portfolio performance suggests opportunities exist in careful credit selection even as market-wide spreads compress.

Position for Year-End Deal Activity. While Q4 traditionally sees reduced transaction volume, the combination of rate cuts, regulatory clarity, and accumulated dry powder could support a strong start to 2026. Sponsors under pressure to deploy capital may accelerate deal timelines, creating opportunities for lenders prepared to execute quickly.

Conclusion

The week ending December 14, 2025, marked a pivotal moment for middle market finance as the Federal Reserve concluded its 2025 easing cycle amid unprecedented internal division. The 175 basis points of cumulative rate cuts have provided meaningful relief for borrowers while the extended pause signals that further accommodation will require compelling evidence of labor market weakness.

The cannabis rescheduling news—whether finalized imminently or through a longer regulatory process—represents just one example of the shifting regulatory landscape that could reshape middle market lending opportunities. As traditional barriers fall and new sectors open to conventional financing, lenders with expertise in specialized industries may find attractive deployment opportunities.

Asset-based lending and private credit continue demonstrating resilience despite spread compression and late-cycle credit softening. Success in 2026 will require balancing the opportunities created by lower rates and deregulation against the risks inherent in compressed returns and emerging credit stress. Market participants who maintain disciplined underwriting while remaining nimble enough to capitalize on regulatory shifts will be best positioned for the evolving middle market landscape.

Footnotes