FOMC meeting, December 9-10

Pressured, not pressed for rate cuts

• The Federal Reserve cut the federal funds rate by 25 basis points (bps) to 3.50%–3.75% at the December 9–10 meeting, pairing the move with a resumption of balance-sheet expansion through Treasury bill purchases to preserve ample reserves and avoid money market stress.

• Divergence across the Committee was unusually visible. Three dissents emerged in opposing directions — Governor Stephen Miran favored more easing, while Presidents Jeffrey Schmid and Austan Goolsbee preferred no change. The dot plot reinforced this polarization, with a 175bps range between the most hawkish and most dovish 2026 views. Chairman Jerome Powell framed the December cut as a hedge against downside risks to employment, noting that the tariff shock is viewed as a level shift in prices rather than a persistent inflation impulse. With the policy rate now within a “broad range” of neutral, Powell emphasized that the Fed is well positioned to wait and observe incoming data.

With the government shutdown generating a data void, the policy statement offered limited new information given the data void from the government shutdown. Language was largely unchanged: slower job gains, rising unemployment and still-elevated inflation. The reappearance of July’s guidance on the “extent and timing of additional adjustments” signals a pause in the easing cycle amid heightened uncertainty.

The dot plot now shows only one additional cut in 2026 and another in 2027, keeping the long-run neutral rate at 3.0%. Yet, underlying views are sharply divided. While only two of the 12 voting policymakers dissented in favor of no policy change, the dot plot revealed that six of 19 officials favored no further cuts this year. The divergence in 2026 is even more striking: while four officials expect a single 25bps cut, seven foresee rates remaining unchanged or being higher, and another eight anticipate two or more cuts (with Miran penciling six rate cuts). Powell attributed the widening dispersion to the tension at the heart of the dual mandate: inflation risks skewed to the upside and employment risks tilting to the downside – with policymakers differing in how they weigh these risks.

The Summary of Economic Projections (SEP) reflected a more optimistic outlook with stronger real GDP growth, slightly lower inflation and steady unemployment – implicitly pointing to productivity as a key driver of economic activity. The median forecast for real GDP growth in Q4 2025 edged up by 0.1 percentage point (ppt) to 1.7% year over year (y/y), while the projection for Q4 2026 saw a notable upward revision of 0.5ppt to 2.3% y/y. Chair Powell noted that the improved outlook reflected resilient consumer spending, ongoing investment in artificial intelligence and an artificial boost induced by the government shutdown. Meanwhile, the median unemployment rate forecast remained unchanged at 4.5% for Q4 2025 and 4.4% for 2026. On the inflation front, headline personal consumption expenditures (PCE) inflation was revised 0.2ppt lower to 2.4% y/y for Q4 2026 while the median core PCE projection was trimmed by 0.1ppt to 2.5% y/y. Most policymakers continue to view inflation risks as skewed to the upside, with projections indicating that core inflation will not reach the target until 2028.

Powell opened the press conference with three guiding propositions for 2026. First, near-term risks to inflation are tilted to the upside while risks to employment to the downside. Second, he reiterated that there is “no risk-free path for policy as we navigate this tension between our employment and inflation goals.” And, most importantly, the federal funds rate is now within a “broad range of plausible estimates of neutral” such that the Fed is well positioned to see how the economy evolves, following 175bps of easing since September 2024.

On December 10, the New York Fed’s Open Market Trading Desk will restart reserve management purchases of Treasury bills, allowing the balance sheet to rise in line with trend demand for Fed liabilities and seasonal pressures such as tax-related outflows. The Desk plans to purchase roughly $40 billion per month, with an elevated pace through early spring to offset an April surge in non-reserve liabilities before tapering seasonally.

Policy deliberations are likely to become even more divided next year. The widely discussed nomination of Kevin Hassett to take up Fed Chair Powell’s chairmanship in May, along with a more hawkish rotation of voting regional Fed presidents, will likely create a dovish faction with Hassett, Michelle Bowman and Christopher Waller on the Board, and a hawkish faction composed of Cleveland Fed President Beth Hammack, Dallas Fed President Lorie Logan and Minneapolis Fed President Neel Kashkari. Governor Michael Barr, Boston Fed President Susan Collins and Vice Chair Philip Jefferson are likely leaning more on the hawkish side while New York Fed President John Williams, Philadelphia Fed President Anna Paulson and Governor Lisa Cook are closer to neutral.

Our view remains that the Fed will hold policy steady in January, with only 50bps of cuts in 2026 — most likely in March and June. These moves hinge on further cooling in labor market momentum and core PCE settling near 3% in early 2026. Market pricing is likely to remain volatile ahead of the combined October–November employment report on December 16 and the combined Consumer Price Index (CPI) release on December 18. With a more hawkish rotation of voting members and the potential appointment of Hassett as Fed Chair, the widening dispersion in policy preferences suggests polarization will increasingly define the Fed’s policy landscape next year. 

The views reflected in this article are the views of the author(s) and do not necessarily reflect the views of Ernst & Young LLP or other members of the global EY organization.