The Federal Reserve cut interest rates by 25 basis points in December as expected, but the number of officials opposing further easing increased to two, signaling a higher threshold for additional rate cuts. Meanwhile, Chair Jerome Powell’s relatively dovish tone and the Fed’s announcement of short-term Treasury bill (T-bill) purchases helped ease market concerns. A previously priced-in "hawkish cut" scenario reversed, amplifying market volatility. Looking ahead, given persistent economic and labor market headwinds, CICC expects the Fed to continue cutting rates in 2026, though the pace may slow due to sticky inflation. The central bank may pause in January, with the next potential cut in March.
**Fed Delivers Expected Cut Amid Rising Dissent** The Fed cut rates by 25bps in December, aligning with market expectations. However, the decision was not unanimous: three officials dissented, with Kansas City Fed President Schmid and Chicago Fed President Goolsbee favoring no change, while Governor Milan pushed for a 50bps cut. The number of policymakers opposing further easing rose to two, reflecting deepening divisions within the Fed.
**2026 Rate Cuts Likely, but Near-Term Hurdles Rise** Markets remain focused on whether the Fed will sustain rate cuts in 2026. The latest dot plot shows 12 officials supporting additional cuts (up by one from September), while seven prefer no further easing—three even project hikes. The median forecast still signals one 2026 cut, unchanged from September. Powell noted that the current 3.5%-3.75% policy rate now falls within the broad neutral range, emphasizing data-dependent flexibility.
Despite a cooling labor market, officials appear hesitant to ease aggressively, likely due to two factors: (1) inflation remains stubbornly above the 2% target, and (2) some expect stronger 2026 GDP growth (revised up to 2.3% from 1.7%). Powell downplayed these concerns, attributing inflation largely to tariffs and suggesting Q4 growth weakness was temporary. He also flagged potential overestimates in recent payrolls data and highlighted AI-driven productivity gains as disinflationary.
**Balance Sheet Adjustments Add Dovish Tilt** To maintain ample reserves, the Fed will buy $40 billion in T-bills this month, sustaining elevated purchases in coming months before tapering. Powell clarified this move aims to ensure smooth policy implementation and avoid tax-season liquidity strains, not to signal monetary stance. Markets interpreted the expansion as dovish.
Post-meeting, risk assets rallied, Treasury yields fell, and the dollar weakened as Powell’s less-hawkish-than-expected tone and balance sheet expansion triggered a reversal of prior hawkish pricing.
**Outlook: Slower Easing Path** CICC maintains its forecast for two 2026 rate cuts, albeit at a slower pace, with a January pause likely and the next cut possibly in March. Downside risks—including tariff- and immigration-driven supply constraints, slowing AI investment, and weaker consumption—may keep pressure on growth. However, if cuts primarily reflect deteriorating confidence, their market impact could be muted.
*Charts omitted for brevity.*
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