The US Federal Reserve cut rates by 25 basis points (bps) as widely expected on 10 December, but market analysts pointed to the “hawkish flavour” in the accompanying statement.
The Fed funds target range has been brought down to 3.5-3.75%, the third cut this year, with the vote split nine-to-three in favour of lower rates.
“One member [temporary Trump appointee, Stephen Miran – and so no surprise] voted for half a percent and two for no change,” explained John Wyn-Evans, head of market analysis at Rathbones. “That slightly hawkish tilt was reflected in forward guidance and a ‘dot plot’ of future rate expectations, including views from non-voting members, which suggests only one further cut in 2026, even though market pricing is for two. More positively, the Fed’s own core inflation expectations saw a reduced forecast of 2.5% (from 2.7%) for 2026.”
The split highlights the uncertainty within the Fed amid a period of “murky, and often missing data”, according to Lindsay James, investment strategist at Quilter.
“[This] made the job of the committee incredibly challenging, leaving private data such as the ADP payroll figures carrying much more weight. This data was not kind in November, with it showing 32,000 private sector jobs were cut in that month, and despite a positive jobs report in from September when it was belatedly released last month, it came marred by downward revisions for August and an overall uptick in unemployment to 4.4%.
“However, there is plenty of evidence to suggest that immigration policy – not Fed policy – is a far greater driver of the apparent slowdown in the jobs market, and so imply that a rate cut – or indeed several – will have limited effect in this area of the economy.”
See also: Neuberger CIO: Fed cuts could make markets fly in 2026
Max Stainton, senior global macro strategist at Fidelity International, also noted the accompanying statement had removed forward guidance on additional cuts.
He said: “Alongside two hawkish dissents, this cut has a hawkish flavour.
“However, the reintroduction of quantitative easing [QE] targeting $40bn bill purchases a month, alongside a set of dots, which retained a cut next year and the year after, suggests there is still a large bulk of the FOMC who see interest rates as being able to fall further before hitting a neutral resting point.”
They also flagged the speculation around the next Fed chair with President Donald Trump “clearing wanting to run the economy hot in the lead up to the mid-terms with earlier expectations for deeper rate cuts in 2026 having been tempered in recent weeks,” said James.
Stainton added: “We expect the market path of interest rates to be increasingly determined by speculation surrounding Trump’s pick to be the new chair, rather than the incoming data. In our base case scenario for 2026, we expect a non-traditional dovish Fed chair to be appointed by the Trump administration, whose main objective is to lower interest rates further.
“This dynamic is likely to make the forward interest rate curve increasingly kinked around when the new Fed chair will start in May 2026, with a new rate-cutting cycle getting priced in if this base case scenario comes through.
“While such a scenario has started to get priced by markets, there is potential for this to extend at both the front and back end of the curves, with a non-traditional dove as Chair an underappreciated risk to the back end.”
