Where is the anticipated celebration of rate cuts? Analyzing the Federal Reserve's "hawkish rate cut" and the expansion of balance sheet through bond purchases that are not QE

The Federal Reserve has cut interest rates by another 25 basis points as scheduled, but internal decision-making revealed the largest disagreement in six years, hinting at a slowdown in actions next year and possibly no immediate moves. This article is sourced from Wall Street Journal, compiled, translated, and authored by Techflow.
(Background recap: The Fed’s rate cut of 1 basis point met expectations! The dot plot shows only one 1 basis point cut in 2026, Bitcoin and Ethereum fluctuate wildly, and U.S. stocks rallied intraday.)
(Additional background: Printing presses are running again! The U.S. Federal Reserve has launched the “Reserve Management Purchase Program,” and from 12/12 for 30 days, it will buy $40 billion in short-term government bonds.)

The U.S. Federal Reserve has again cut interest rates by 25 basis points as scheduled, and still expects to cut once next year, initiating RMP to buy short-term debt worth $40 billion. However, this reveals the largest internal disagreement among voting decision-makers in six years, implying a slowdown in the pace of actions next year and possibly no immediate moves. The Fed also, as Wall Street anticipated, activated reserve management, deciding to buy short-term government bonds at the end of the year to respond to pressure in the money markets.

On Wednesday, December 10, Eastern Time, after the Federal Open Market Committee (FOMC) meeting, the Fed announced that the target range for the federal funds rate was lowered from 3.75%–4.00% to 3.50%–3.75%. This is the third rate cut of 25 basis points this year. Notably, this is the first time since 2019 that the Fed’s rate decision has been opposed by three votes.

The dot plot published after the meeting shows that the Fed’s rate path projections are consistent with those announced three months ago, still expecting one 25 basis point rate cut next year. This indicates a significant slowdown compared to this year’s rate cuts.

As of Tuesday’s close, CME tools indicate that futures markets estimate an approximately 88% chance of a 25 basis point rate cut this week, and the probability of at least another 25 basis point cut by June next year is only 71%. The chances of such cuts at the January, March, and April meetings are all below 50%.

The forecast reflected by the CME tools can be summarized by the trending term “hawkish rate cut.” It refers to the Fed cutting rates this time but also hinting at a possible pause afterward, with no imminent rate cuts.

Nick Timiraos, a senior Fed reporter known as the “new Fed news agency,” directly stated in a post-meeting statement that the Fed “hinted that it may not cut rates again for the time being,” due to “rare” disagreements within the Fed regarding whether inflation or the labor market is a more concerning issue.

Timiraos pointed out that three officials dissented on the rate cut of 25 basis points, making this meeting the most divided in recent years due to stagnant inflation decline and cooling labor markets.

During the press conference, Powell emphasized that he does not believe “the next rate hike” is a basic assumption for anyone. The current rate level allows the Fed to patiently wait and observe how the economy evolves. He also stated that current data indicates the economic outlook has not changed, and that the scale of Treasury bond purchases may remain high in the coming months.

Previously, many expected the dot plot to reflect future rate movements showing a more hawkish stance among Fed officials. This time, the dot plot shows a more dovish tilt compared to the last one.

Out of 19 Fed officials providing projections, seven anticipate the rate next year will be between 3.5% and 4.0%, compared to eight in the previous projection. This means one fewer person expects no rate cut next year.

The economic outlook released after the meeting shows Fed officials have raised GDP growth expectations for this year and the next three years, and slightly lowered the unemployment rate forecast for 2027 and the following year by 0.1 percentage points, with the unemployment rate for other years unchanged. This adjustment indicates that the Fed views the labor market as more resilient.

At the same time, Fed officials slightly lowered their PCE inflation and core PCE inflation forecasts for this year and next by 0.1 percentage points each, reflecting increased confidence that inflation will slow down in the near future.

( Powell: Patience is Key at Current Rate Levels

With today’s rate cut, the Fed has cumulatively lowered the policy rate by 75 basis points over the past three meetings. Powell stated that this will help bring inflation gradually back to 2% once the impact of tariffs subsides.

He said that adjustments made since September have brought the policy rate into the estimated “neutral” range of various estimates, with the median forecast of FOMC members indicating an appropriate level of 3.4% for the end of 2026 and 3.1% for the end of 2027, unchanged from September.

Powell stated that, currently, inflation risks are skewed to the upside, while employment risks are skewed to the downside, creating a challenging situation.

A reasonable basic judgment is that tariffs’ impact on inflation will be relatively brief, essentially an one-time upward shift in price levels. Our responsibility is to ensure this temporary increase does not evolve into a persistent inflation problem. Meanwhile, downside risks to employment have increased in recent months, and the overall risk balance has shifted. Our policy framework requires balancing the dual mandate’s two aspects. Therefore, we believe it is appropriate to lower the policy rate by 25 basis points at this meeting.

As inflation progress stalls, Fed officials have already hinted before this week’s decision that further rate cuts may require evidence of labor market weakening. Powell stated at the press conference:

“We are currently in a position that allows us to be patient and watch how the economy develops.”

In response to a question about whether the current policy rate, now closer to neutral, will necessarily be lowered next or if policy risks have shifted to a truly two-way stance, Powell responded that no one currently assumes rate hikes, and he has not heard of such views. There are differing opinions within the committee: some members believe the current stance is appropriate and advocate for holding steady and observing; others believe rate cuts may be needed again this year or next, possibly more than once.

When members list their views on the policy path and appropriate rate levels, the main scenarios include either maintaining the current level, small rate cuts, or slightly larger cuts. Powell emphasized that the current mainstream expectations do not include rate hikes.

Powell also stated that, as an independent decision, the Fed has decided to initiate purchases of short-term U.S. government bonds, solely to maintain ample reserve supplies over an extended period, to ensure the Fed can effectively control the policy rate. He stressed that these issues are separate from the stance of monetary policy itself and do not indicate a change in policy orientation.

He indicated that the scale of short-term bond purchases may remain high in the coming months, and the Fed is not strictly “worried” about tension in the money markets, but such conditions are arriving slightly earlier than expected.

Powell also noted that, according to the New York Fed, initial asset purchases will reach $40 billion in the first month and may stay at a high level for the subsequent months to alleviate anticipated short-term market pressures. Afterwards, the purchase scale is expected to decline, with the pace depending on market conditions.

Regarding the labor market, Powell said that although official employment data for October and November have not yet been released, existing evidence suggests layoffs and hiring activity remain at relatively low levels. Meanwhile, households’ perceptions of job opportunities and firms’ recruitment difficulty are continuing to decline. The unemployment rate continues to slightly rise to 4.4%, and job growth has slowed significantly compared to earlier this year. Also, the Fed’s statement no longer uses the phrase “the unemployment rate remains low.”

In the subsequent Q&A, Powell mentioned that, after adjusting for overestimations in employment data, employment growth since April might have turned slightly negative.

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Tags: Reserve Management, Federal Reserve, Monetary Policy, Rate Cut, Hawkish, Rate Cut