By Ahmad Assiri, Research Strategist at Pepperstone
The Fed delivered a rate cut as expected, effectively keeping policy on the same broadly priced trajectory without introducing any substantive shift. The post-meeting statement emphasised that the risks around the Fed’s dual mandate remain balanced. Inflation is still somewhat elevated and may reach its anticipated peak in the first quarter of next year once the impact of tariffs is likely absorbed, while the labour market downside represents risk on employment mandate but not in a way that urgently warrants accelerating the pace of easing. The Fed reiterated its commitment to price stability and signaled that it will remain guided by incoming data.
It’s also noted that reserve levels in the banking system remain adequate, which allows the Fed to direct its purchases toward in treasuries to support liquidity when required in the secondary market. This comes at a time when the short-term borrowing has shown signs of tightening. The shift from a tightening stance by the Fed that ended earlier this month to short-term securities purchases when needed reflects an evolving liquidity environment. In practice, this resembles a form of short-dated quantitative easing, though policymakers appear keen to avoid the label given its association with the previous decade and the pandemic period, both of which carry different economic implications and yield curve dynamics.
The vote revealed a clear division within the FOMC, though less pronounced than markets had feared. 9 members supported the decision and 3 dissented. Miran called for a larger jumbo cut as was very much expected, while Goolsbee and Schmid preferred to leave rates unchanged, consistent with their prior moments past month. This is one of the more notable splits in recent years, but again, not a surprise. The split is understandable given the shifting economic backdrop and the absence of timely data due to the government shutdown, which has delayed the inflation and employment releases.
The dot plot delivered the clearest message in my view. There was no change in the projected rate paths for the coming years. The 2026 median estimate remained at 3.375% and the long run rate stayed anchored at 3%. This stability reflects a shared view that the current trajectory is appropriate and does not need recalibration as of now. It also shows that the Fed sees no reason at this stage to guide markets toward a deeper easing cycle or hawkish horizon.
Market reaction was constructive, not because the Fed introduced a dovish impulse but because it avoided a hawkish one. December typically carries a favorable seasonal tone for equities and the absence of a restrictive message was enough to keep sentiment in line. Markets received what they largely needed. A measured cut, a better than feared level of dissent and a dot plot that remained almost entirely unchanged. The resulting optimism reflects December seasonality more than a policy pivot. There is now a need for the narrative ideally to shift back toward fundamentals such as sector outlooks and earnings growth moving into 2026 rather than too much of reliance on monetary easing as the dominant support that characterised most of the second half of the year.
Pricing for a cut at the first meeting of 2026 is minimal while the market assigns roughly 55% to a move in March. At the same time there is no signal of tightening on the horizon and markets had already dismissed that scenario with a Fed that is as dovish as possibly and reasonably could. This stance allows investors to maintain December’s constructive tone, yet it also leaves near term price direction dependent on delayed data rather than policymakers guidance. The inflation and labor market releases once they are available will carry weight in determining the market outlook in the coming weeks than policy expectations alone.