The Federal Reserve delivered a widely expected 25-basis-point (bp) rate cut in December, then signaled a more data-dependent path ahead. Barring an economic shock, we probably won’t see another rate cut until the second half of next year.
In the weeks since the previous meeting in October, several Fed officials had expressed discomfort with further rate cuts. Indeed, two officials dissented outright at this meeting by voting to hold the rate steady (and one official voted to cut 50 bps). Four officials used the new economic projections – or “dot plot” – to show they would have preferred to pause in December. Consistent with this sentiment, the statement changes reflected a committee poised to hold rates steady after cutting rates by 75 bps over the past three meetings.
During the press conference, Fed Chair Jerome Powell emphasized downside labor market risks as an impetus for the rate cut. Given an increasingly large share of the rate-setting committee seemed uncomfortable with further cuts, and with the policy rate within “plausible estimates of neutral,” he noted that the Fed should be well-positioned to wait for more data and to react as risks to the outlook evolve.
Bond yields moved modestly lower as Powell declined to provide a firmer signal that the Fed does not expect to cut again and instead embraced data dependence.
The fed funds rate in 2026
Our policy outlook is largely aligned with that of Fed officials and with current market pricing: We expect the Fed to hold rates steady in a range of 3.5%–3.75% for the remainder of Powell’s term as chair, which runs through May, before resuming gradual rate cuts later in the year under new Fed leadership.
There’s “persistent tension” in both parts of dual mandate, as Powell phrased it. Surprisingly resilient U.S. growth in the second half of 2025, plus household and business tax cuts that will boost after-tax incomes in 2026, risks further delaying inflation’s progress toward the Fed’s 2% goal. Nevertheless, the Fed remains well-placed to cut further if stronger growth fails to stabilize the increasingly soft U.S. labor market. And even if downside risks are avoided, we believe the Fed will likely be able to resume gradual rate cuts in late 2026 as inflationary pressures ease.
The Fed faces a delicate balancing act: Curb inflation while supporting the labor market so that households feel economically secure. Powell warned there is no risk-free path. He noted a reasonable baseline is that tariff-driven inflation effects – essentially a one-time shift in the price level – will likely ease, and he highlighted notable progress this year on non-tariff-related inflation. On the labor market, October data were not collected and November data are incomplete, so upcoming data must be assessed carefully. Consumer spending and productivity appear to support economic activity. Fiscal policy remains supportive, and business investment in AI is holding up.
December statement and projections: Policy rate is within the range of neutral
The Fed statement had just one notable change. It borrowed a phrase from the December 2024 statement – when the Fed likewise had just cut by 75 bps over the course of three meetings – by saying that the “extent and timing” of further rate adjustments will depend on the data. And after the December 2024 statement, the Fed held the rate steady for much of 2025.
Similarly, the Fed’s new economic projections were only modestly changed versus their September vintage. Growth forecasts for 2026 were revised higher, with the median participant now projecting 2.3% versus 1.8% before. But this notable uptick didn’t translate into large changes elsewhere. Median unemployment projections were unchanged, and inflation projections were just barely revised down. The median rate path projection was unchanged, implying only one rate cut in 2026.
The December statement and projections reflect a Fed that now views monetary policy as within the range of neutral estimates – i.e., a rate the Fed expects will help promote trend-like growth.
Technical changes to the Fed balance sheet
The Fed also announced technical adjustments to its balance sheet and repo programs to address recent volatility in money market rates. The Fed will start Treasury bill purchases to help provide liquidity and ensure that reserve balances do not decline further. This announcement was both somewhat earlier and somewhat larger in size than many market participants were expecting, and we saw money market rates rally a few basis points on the news.
Powell went out of his way in the press conference to emphasize that this was a technical adjustment that should not be confused with the kind of policy-focused quantitative easing programs the Fed undertook in an effort to stabilize the economy in the past two recessions.
