Rate Cut
The decision on the new level of interest rates, which took effect on December 10, resulted in a 25-basis-point cut. The new target range now stands between 3.5% and 3.75%. This move met expectations set by the CME Group; however, it was a so-called “hawkish cut,” signaling considerable caution regarding future decisions. Jerome Powell, Chair of the Board of Governors of the Federal Reserve System of the United States, commented as usual: “The monetary committee is well positioned to wait and monitor economic developments.” With this statement, Powell sent a clear signal to investors that the Fed currently sees no reason for a series of further cuts without clear justification related to inflation or the labor market.
A Divided FOMC
The vote itself revealed one of the deepest divisions in recent years – the 9:3 voting split last occurred in 2019. Stephen Miran called for a more aggressive half-percentage-point cut, while Jeffrey Schmid and Austan Goolsbee opposed any change in rates. Ultimately, this reflects uneven signals from the economy. Inflation has declined, but the labor market is gradually cooling, and prolonged government shutdowns have created notable gaps in reported macroeconomic data.
What Lies Ahead?
In addition to Powell’s verbal guidance, the Fed also published an official updated projection of future interest rate developments, which significantly dampened investor optimism. Looking ahead, only one rate cut is expected for each of the years 2026 and 2027, followed by stabilization around the 3% level. As indicated by previous information, the Fed is currently not unified, with seven committee members stating they do not expect any further easing in 2026. Investors can take away a clear message – low interest rates typical of the pre-pandemic era are unlikely to return anytime soon.
Resumption of Treasury Purchases
A notable element of the meeting was the announcement that the Fed will resume purchases of U.S. Treasury securities. This operation is not classic quantitative easing, but rather a response to growing issues in short-term bank funding. The central bank will begin by purchasing Treasury bills worth USD 40 billion. This pace is expected to be maintained for several months until a significant reduction is achieved.
Macroeconomics
Regarding macroeconomic estimates, the Fed’s new projections forecast GDP growth of 2.3% for 2026, an increase compared to the September projection of 1.8%. This suggests that the U.S. economy maintains relatively strong momentum despite restrictive conditions. On the other hand, the Fed openly acknowledges that inflation will move toward its 2% target only very slowly. Projections indicate that a true 2% inflation environment may not emerge before 2028. [1]
The Post-Powell Era
Finally, Jerome Powell is approaching the end of his tenure, with only three meetings remaining. President Donald Trump has announced that the next Fed chair will be evaluated based on a preference for lower interest rates—potentially leading to a dramatic shift in monetary policy in 2026. According to markets, the most likely candidate is Kevin Hassett, followed by Kevin Warsh and Christopher Waller. As a result, markets must factor in not only the economic outlook but also political pressure that could push monetary policy toward faster easing. [2]
[1,2] Forward-looking statements are based on assumptions and current expectations that may be inaccurate or based on the current economic environment, which may change. Such statements are not guarantees of future performance. They involve risks and uncertainties that are difficult to predict. Actual results may differ materially from those expressed or implied in any forward-looking statements.
