As widely anticipated, the Federal Open Market Committee (FOMC) cut interest rates by 25 basis points at its December meeting, lowering the federal funds rate target range to 3.50%-3.75%. With this third consecutive rate cut in the current cycle, and Chair Jerome Powell framing the resumption of easing as a "risk management" measure, the critical question emerges: What policy path will the Fed chart for 2026? Will voting members recalibrate the current "recalibration" trajectory?
From Recalibration to Data Dependence Back in September 2024, when the FOMC initiated this easing cycle, Chair Powell described it as a monetary policy "recalibration." After 175 basis points of cumulative rate cuts over 15 months, the Fed now appears inclined toward "awaiting data guidance" to determine whether further easing is warranted. Multiple regional Fed presidents have reiterated this stance, creating an impression of internal divergence. To secure this latest cut, Powell had to acknowledge dissenting views and compromise on future policy direction—yet the decision still faced opposition in the policy statement.
Pre-government shutdown economic conditions suggested policy might not need full "accommodation," but rather a return to "neutral"—a point Powell and colleagues have repeatedly emphasized. Herein lies the crux: if markets perceive neutral rates beginning around 3.50%, current levels are already near-neutral.
The Neutral Rate Puzzle and Murky Jobs Data The Fed and bond markets have re-entered heightened data-dependency mode. Why "heightened"? With 75bps of cuts in three months, policy now lags far less than pre-September. Future adjustments will hinge directly on incoming economic data. With inflation still about 1 percentage point above the Fed's 2% target, the FOMC needs clearer labor market cooling to consider additional cuts.
Complicating matters, even after the shutdown's resolution, December meeting data remained ambiguous. Critical November (and partial October) employment reports won't release until Tuesday (December 16). Recent mixed jobs indicators and persistent flatlining in weekly jobless claims suggest an ongoing hiring freeze.
FX Implications: USD/JPY Case Study The meeting provided no clear directional cues for FX markets, instead converting a policy inflection point (sequential cuts) into an observation period. Key implications: 1) Establishing "data dependence" as the primary trading logic for coming months 2) Heightening policy uncertainty by exposing internal divisions.
The shift to "cautious data-dependent easing" sets a new USD/JPY trading paradigm. While the easing cycle confirms medium-term downside pressure, internal dissent and tempered expectations create "speed bumps" for the descent. Traders might navigate USD/JPY fluctuations by balancing long-term USD yield declines and narrowing spreads against interim data surprises and policy expectation swings. On Monday, USD/JPY fell approximately 0.50%.
(USD/JPY daily chart sourced from EasyForex)
Core Conclusion: With this contentious cut now implemented, the bar for future easing may have risen. The Fed's "dovish camp" achieved its immediate goal—now economic data must persuade hawkish members to support further accommodation. As of 15:19 Beijing time, USD/JPY traded at 155.14/15.
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