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Central Bank Watch

A NEUTRAL FED CUT RATHER THAN MARKET’S EXPECTATION OF A HAWKISH CUT

ADMIN || 11th December 2025

Today’s 25 bps cut by Fed was not as hawkish as markets have expected. There were only 3 dissents against market expectations of 4 or more than 4 dissents. The rate cut was approved 9-3, with two regional Fed presidents (Austan Goolsbee from Chicago and Jeff Schmid from Kansas City) preferring to leave rates unchanged and one Fed governor (Stephen Miran) favouring a larger half-point reduction.

But the DOTS showed a different picture. There were six policymakers who submitted economic projections showing they preferred for their benchmark to end 2025 at a range of 3.75% to 4%, which is where it was before today’s move. In addition to Schmid and Goolsbee, we think the other dots favoring no cut were from Cleveland Fed President Beth Hammack, Dallas Fed President Lorie Logan, St. Louis Fed President Alberto Musalem, and Richmond Fed President Thomas Barkin. DOTS for 2026 showed only one cut against current market pricing of 2 cuts.

The updated Summary of Economic Projections (SEP) showed a sharply higher outlook for growth and a somewhat lower view for inflation. That suggests FOMC participants are baking an acceleration in productivity into their forecasts.

The policy statement contained some significant edits. On the dovish side, it acknowledged the unemployment rate had moved up, omitting a previous description that it had “remained low.” That’s a dovish change that suggests the committee has become more concerned about labor-market conditions. The statement also saw a return of the phrase “the extent and timing of” additional rate adjustments – that’s hawkish, as the same phrase was added to the December 2024 statement just before the FOMC went on an extended pause.

Powell struck a dovish tone at the news conference, calling job creation “extremely” weak and noting payrolls were running at a negative monthly pace.

FOMC announced reserve balances have “declined to ample levels” and that it will buy shorter-term Treasuries “as needed” to keep them that way. The implementation note didn’t mention quantities, saying only that SOMA holdings should rise through purchases of Treasury bills and, if needed, other Treasuries with maturities of three years or less.

Summary: Coming into the Dec. 9-10 meeting, many observers knew the majority of FOMC participants were against cutting rates. But the fact that most of the dissent happened softly in the dot plot rather than in open votes is a testament to Powell’s ability to build a consensus even when his view is in the minority. Weak labor data since the last FOMC meeting add to the case for a dovish cut, and we think Powell reflected that shift at the news conference even as he acknowledged the chorus of hawkish voices on the committee. We expect today’s cut as the last cut while Powell remains as Fed chair till May. We expect two more rate cuts of 25 bps each in June’26 & Sep’26.

We now expect US yield curve to steepen further with long end likely to rise unless there is a global risk off. DXY might strengthen as US GDP grows at more than potential as seen in the 2.3% GDP growth projection for CY26. US equities are likely to remain well supported.

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