Christian Hoffmann shares his perspective on the Fed’s stance and the potential impact of monetary policy.
Details of the Fed Announcement
The FOMC cut rates 25 basis points, and its target range dropped to 3.50-3.75%, representing the third consecutive cut in 2025. However, the move included clues about where policy is going with three “no” votes, which hasn’t happened in over six years (September 2019). The Fed used a similar language as in December 2024 in saying, “In considering the extent and timing of additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks.” That previous signal indicated the Fed was done cutting rates for the time being (until September 2025).
Christian’s Views
As widely anticipated, the FOMC cut rates by 25 basis points to a range of 3.50–3.75%. Recall that Powell’s effort to make this a “live meeting” pushed cut expectations as low as 30% in mid-November before recent Fed signals realigned expectations toward a hawkish cut. We viewed the probability of a cut at this meeting as essentially 100%. Dissents are becoming routine: three today—two hawkish (favoring no cut) and one dovish (Miran pushing for 50bp again and Goolsbee and Schmid preferring no cut).
“Extent and timing” language in the statement is reminiscent of language used in December 2024 to lay the groundwork for a pause. SEP tweaks were broadly in line with expectations: growth revised up, unemployment tweaked modestly lower, and near-term inflation marked down, a mix that, in theory, justifies today’s move. Still, inflation remains well above target and has for nearly five years. Balance sheet actions include reserve management purchases (RMPs) starting this week. The interest rate paid on reserve balances has decreased from 3.90% to 3.65%.
The focus now shifts to thresholds for January and 2026 and whether Powell can credibly signal a pause. With just one cut penciled in for 2026 and one for 2027, the Fed is threading the needle between risk management and not completely ignoring inflation. We’ll look for insights into the current state of the economy and any updates to the Fed’s reaction function into the first half of 2026 under Powell, even as attention pivots to the next Chair, likely Hassett, though not yet confirmed. Powell’s signals matter for now, but the market narrative is already shifting.
Key Takeaways
The central bank’s dot plot, which shows individual members’ anonymous expectations, indicates a median estimate of 3.1% for the federal funds rate at the end of 2027. This indicates just one cut in 2026 and another in 2027. No cuts are projected for 2028. One surprise from the Fed was that it will start buying U.S. Treasury bonds again ($40 billion). These purchases are expected to remain “elevated” for a few months before they are “significantly” reduced.
While the Fed is predicting just one rate cut in 2026, Fed funds futures suggest a roughly 68% chance that the central bank will cut rates two or more times in the new year. Fed Chair Powell commented in his press conference that inflation remined “somewhat elevated” due to the impact of tariffs. Powell added that there is no risk-free policy path as it navigates the tension between employment and inflation goals.
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