The holidays are here. But many investors may be feeling like they made it onto the naughty list as they contend with challenges from turmoil in Washington as President-elect Donald Trump and Elon Musk flex their newfound political power to a souring outlook on the Fed's interest rate policy, with fewer cuts expected to come next year.

Markets gained ground on the final trading day last week. But it wasn't enough to overcome the double whammy of the threat of a government shutdown and hawkish signals from the Federal Reserve, which appears newly concerned about persistent inflation in the months ahead.

In the past week, the Dow Jones Industrial Average (^DJI) broke a 10-day losing streak but recorded a loss of 2.3% for the week. The Nasdaq Composite (^IXIC) shed 1.8%, while the S&P 500 (^GSPC) fell 2%.

After a dramatic week, investors are set to receive a relative trickle of economic news. Markets close early on Tuesday and won't reopen until Thursday. But the holiday-shortened week will still give Wall Street a chance to parse through the Fed's expectations for next year's interest rate decisions. Central bankers now predict a shallower rate-cutting path in 2025. A renewed "higher for longer" policy approach will hang over the final trading days of the year.

The Fed Grinch

Entering the Christmas holiday, markets are well down from the exuberant highs of early December. Much of that shift is tied to perceptions that the Federal Reserve, while initiating its third consecutive interest rate cut last week, is poised to take a more cautious approach next year. Instead of expecting four cuts in 2025, central bankers now foresee just two.

Markets are still wrestling with the implications of the latest "higher for longer" signal. Adding another wrinkle was Friday's reading of the Federal Reserve's preferred inflation gauge, which showed that, excluding volatile categories like food and energy, price increases fell month over month in November but still remained sticky.

The lone dissenter of the Federal Reserve's most recent policy decision said she voted against the move to cut rates on Wednesday because "there is more work to do on inflation."

"Based on my estimate that monetary policy is not far from a neutral stance, I prefer to hold policy steady until we see further evidence that inflation is resuming its path to our 2% objective," said Beth Hammack, the president of the Cleveland Fed.

But both the dissenter and Fed Chair Powell appeared to agree that a cautious approach to inflation is the right one. And the way markets roared back on Friday signaled that Wall Street may have overreacted to the central bank's message, which has arguably not changed all that much.