Following the Fed's dovish rate cut in December, market expectations for monetary easing have persisted. With year-end liquidity thin, investors are focusing on the meeting minutes for clues on the 2026 policy path. The minutes reveal a deep divide within the FOMC regarding the primary risks to the economy—some are concerned about employment, while others remain vigilant on inflation.
Since the December 10 Fed meeting, which resulted in a more dovish-than-expected outcome—a 25 basis-point rate cut but with three dissenting votes—precious metals have been the biggest winners due to a weaker dollar, while crude oil has lagged. Equity markets have edged higher, and bonds have shown little movement. In early Asian trading on Wednesday, spot gold traded in a narrow range near $4,335 per ounce, remaining near its yearly highs; U.S. crude oil also fluctuated narrowly around $57.95 per barrel; the U.S. dollar index hovered near 98.25, after touching a near three-month low of 97.75 on the 24th.
Market-implied probabilities for rate cuts have risen significantly, with the likelihood of a cut by March 2026 showing a particularly notable increase.
Given the recent absence of major market catalysts and generally subdued fundamentals and trading volumes, investors are paying closer attention to the Fed's December meeting minutes. Current market expectations are already significantly more dovish than what the Fed's dot plot indicates. After the exposure of a severe internal split at the Fed—the most dissenting votes in 37 years—the policy outlook appears murky, yet the exuberant market seems largely oblivious. Amanda Agati, Chief Investment Officer at PNC Asset Management Group, said on Tuesday, "The stock market is like a child in a candy store, intoxicated by the sugar rush of chasing more policy easing and a more dovish Fed, completely unaware of the pros and cons for itself." "The bond market, however, is like the adult in the house, taking away the child's last lollipop. This might be the first time in observable market history that the market is reacting to concerns over fiscal deficits and debt levels. I believe longer-term yields will undoubtedly continue to face upward pressure."
Previously, Joseph Dahrieh, an analyst at Tickmill Group, noted in a report, "We are currently in a period of thin year-end liquidity, where price movements can be exaggerated. The market is hoping the minutes will provide clearer signals on the Fed's policy path for 2026." He added that if the minutes clearly lean towards further rate cuts in 2026, it could pressure the U.S. dollar and Treasury yields. Conversely, if the minutes strike a more balanced or cautious tone on rate cuts, it could provide near-term support. The market's core concerns can be summarized around two key focal points: How deep is the division? And what is the communicated stance on "non-quantitative easing" policies? What signal is the Fed really trying to send? The meeting minutes highlight a significant divergence among the 19 policymakers regarding the greatest threat to the economy: Is it weakness in the labor market, or persistently high inflation? Most officials believed that if inflation continues to recede as expected, further rate cuts would be appropriate. However, some officials explicitly stated they favored keeping rates steady "for a time" following the December meeting. The minutes indicate that even some officials who supported the rate cut had reservations. "A few participants who supported reducing the policy rate at this meeting noted that the decision was a close call—they could also have supported leaving the target range unchanged." This phrasing suggests the internal disagreement might not be as sharp as some external speculation implied. Nevertheless, the minutes clearly state that policymakers remain significantly divided on whether inflation or unemployment poses the greater risk to the U.S. economy. "A majority of participants judged that moving to a more neutral policy stance would help mitigate the risk of a significant deterioration in labor market conditions." Simultaneously, the minutes further noted: "Some participants emphasized the risk that high inflation could become entrenched, and expressed concern that further rate cuts while inflation readings remain elevated could be misinterpreted by markets as the Committee reducing its commitment to achieving the 2 percent inflation target." Finally, the minutes confirmed that participants generally assessed reserve balances had "declined to an ample level"—indicating it was appropriate to commence purchases of Treasury bills to maintain an ample supply of reserves over the longer term. The market's reaction to this information has so far been muted: implied probabilities for rate cuts are unchanged, and while equities are active, they lack a clear directional trend. Overall, the U.S. dollar is caught in a tug-of-war between "dovish expectations" and the "reality of inflation." The minutes failed to provide a clear directional signal, instead highlighting this very contradiction. While the market chases the "candy" of rate cuts, it remains wary of inflation's "ruler," a conflicted psychology that has trapped the dollar in a range-bound pattern with clear resistance above and support below.
(DXY Daily Chart, Source: EasyForex) As of 09:11 Beijing Time, the U.S. Dollar Index is at 98.23.
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