The Federal Reserve cut interest rates by 25 basis points at its December meeting, marking the third consecutive reduction.
Goldman Sachs analyst Giulio noted in a report that despite the highest number of dissenting votes since 2019 and an upward revision to growth forecasts—giving the decision a somewhat "hawkish" tone—the overall stance was "less aggressive than feared," successfully balancing risks and eliciting a positive market reaction.
The Federal Open Market Committee (FOMC) voted 9-3 to lower the benchmark rate to 3.5%-3.75%. The split vote saw Schmid and Goolsbee favoring no change, while Miran pushed for a steeper 50-basis-point cut. The policy statement reintroduced language about considering "the extent and timing of any additional adjustments," signaling a shift toward cautious evaluation of future data and labor market risks.
Markets responded positively, interpreting the move as a successful "risk management" rate cut. Despite defensive positioning ahead of the meeting, the S&P 500 rose post-announcement, while the dollar index and 2-year Treasury yields dipped to session lows.
Additionally, the Fed announced plans to purchase short-term Treasuries starting December 12 to maintain ample reserve levels, a technical adjustment that further supported sentiment.
Goldman Sachs highlighted that while Chair Powell stressed there is "no risk-free path" and offered no clear pause-or-cut signal for January, his communication effectively eased both hawkish and dovish concerns. The policy path leaves the door open for further cuts, but future adjustments will hinge on upcoming employment and inflation data.
**Divided Votes and "More Resilient" Economic Outlook** The meeting’s most notable feature was heightened FOMC dissent. The 9-3 vote revealed internal disagreements: beyond Schmid and Goolsbee’s push to hold rates, multiple members projected higher-than-expected rates in 2026 via the "dot plot," reflecting a "soft dissent."
The latest economic projections showed 2026 and 2027 each penciling in one cut, but six "soft dissent" dots for 2026 tilted slightly hawkish. Meanwhile, the Fed upgraded GDP growth forecasts—2026 raised to 2.3% from 1.8%, and 2027 to 2.0% from 1.9%—reflecting resilient consumer spending, AI-driven capital expenditure, and post-shutdown recovery. Core PCE inflation for 2026 was trimmed to 2.4%, with unemployment expected to peak in 2025.
**"No Preset Path" and Labor Market Uncertainty** Powell reiterated the Fed’s dual mandate and noted little change in employment or inflation expectations due to sparse new data. Goldman Sachs interpreted the reintroduced "adjustments" language as signaling a pause to assess conditions after 75 basis points of cuts since September, suggesting rates may stay at current levels longer.
Powell emphasized no decision has been made for January and ruled out hikes as a baseline. The choice now lies between holding rates or cutting further, not between cuts and hikes. On the labor market, he noted potential overestimation of job growth by ~60k (implying ~20k fewer monthly jobs since April) and framed current cuts as a response to rising unemployment and slowing hiring.
**Resuming Bond Purchases to Bolster Reserves** Beyond rates, the Fed announced plans to buy short-term Treasuries from December 12 to maintain "ample" reserves. Goldman Sachs cited New York Fed data indicating ~$40B in monthly purchases, combined with ~$20B in MBS reinvestments, totaling ~$60B per month. Purchases may slow post-April as Treasury General Account balances decline, ensuring liquidity without market disruption.
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