Fed Cuts and Tees up a Pause

The Federal Open Markets Committee (FOMC) on December 10 cut the federal funds rate 25 basis points to a range of 3.50–3.75%. There were three dissents—the most in six years—as two voters favored no cuts, while one favored a 50 basis point cut, though the dot plot of rate projections indicated broader “soft” dissent among the 19 officials.

While expectations of this meeting had been for a “hawkish cut,” the Fed instead delivered what we view as a balanced, risk-friendly cut that hinted at an extended pause driven by improved growth dynamics. With the rate near neutral, the Fed is “well positioned” to wait and see how the economy evolves as data reporting impacted by the government shutdown catches up and fiscal stimulus kicks in during the first quarter.

The median FOMC participant forecasts one additional cut in both 2026 and 2027, though the distribution of forecasts was extremely wide. Futures markets, in contrast, are pricing a little over two cuts next year, with the first cut fully priced in for June when the next chair takes over from Powell. The market is not pricing any further cuts beyond 2026.

The Fed also announced that it will begin buying Treasury bills to expand its balance sheet at a pace of $40 billion per month starting on December 12 to ensure reserves remain ample. Its quantitative tightening program ended on December 1.