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Central Bank Watch

A DIVIDED FED MEANS A HAWKISH CUT IN DEC FOMC

ADMIN || 2nd December 2025

With investors seeing potential that a divided Fed delivers a hawkish cut this month, the Treasuries yield curve is biased to regain a steeper profile.

Once a rarity under Powell, dissents increased this year creating uncertainty. Recall, September’s quarter point rate cut was deemed risk management. And October’s easing was a very mixed outcome, with the Fed chair signalling the next meeting may bring a pause, while there was one dissent in favor of a 50-bp cut and another in favor of a hold.

The curve has steepened steadily since then, and with traders convinced there will indeed be a cut next week that anchors the short end to open the path for that trend to extend. The spread between 2- and 10-year yields stands at about 55bps Monday, from ~47bps after the Oct. 29 FOMC.

Headed into the Fed’s December pre-meeting blackout five of the 12 officials who vote on policy this year indicated they’re leaning toward keeping rates on hold next week. That raises the potential that a cut would be accompanied by rhetoric signalling caution about further easing. That’s especially the case after the government shutdown clouded the economic data picture, muddying the outlook for monetary policy in 2026.

Fundamentally, the 2-year sector should remain bid as Fed swaps price in a reduction on Dec. 10 and a series of cuts throughout 2026. That’s wouldn’t be a big surprise given White House National Economic Council Director Kevin Hassett, who favors lower rates like President Donald Trump, is seen as likely to win the job of Fed chair.

The long-end meantime faces greater barriers to yield declines, especially given the potential that the need for greater borrowing by the Treasury Department will drive already sticky term premiums higher. That means a steeper curve looks the likeliest outcome with longer-dated yields biased to remain higher, while short-end ones should fall provided monetary policy evolves as expected.

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