Fed review: Not-so hawkish cut
- The Fed cut its policy rate target by 25bp to 3.50-3.75% in line with expectations. All administered rates were cut by an equal amount. Miran voted for a 50bp cut, while Schmid and Goolsbee voted for unchanged, also in line with expectations.
- The Fed announced further easing to its liquidity policies by starting reserve management purchases of T-bills from 12 December. The purchases will be front-loaded with an initial pace of USD40bn per month, which is more than we expected. The pace will be 'significantly reduced' after 'a few months' (see p. 2 of the report for details).
- The median GDP forecasts were revised higher for 2026 and 2027. Updated 'dots' showed that 6 participants would have preferred to maintain rates unchanged. We make no changes to our call and expect two more rate cuts in March and June.
- Markets (and we) expected a 'hawkish cut' going into the meeting. But as Powell avoided sending strong signals to either direction, UST yields declined, and broad USD weakened over the course of the press conference.
The Fed delivered the widely anticipated 25bp cut, which brought its policy rate target to 3.50-3.75%. As the current level is now at the upper end of FOMC's range of estimates for the neutral rate, Powell made it clear that the Fed is in no hurry to ease its policy further. At the same time, he also refrained from clearly pushing back against the market pricing, which currently sees slightly more than 50bp of additional cuts for the coming year. As we (and the markets) had expected a more explicitly hawkish tone, UST yields and the broad USD ended the day lower.
The updated median economic projections saw GDP growing by 2.3% in 2026 (from 1.8%), which is somewhat larger positive revision than we had expected. As the forecast for unemployment rate was largely unchanged, Powell highlighted stronger outlook for productivity growth as a possible growth driver. Headline inflation forecasts were revised down slightly (2.4% in 2026, from 2.6%), likely reflecting lower energy prices. Core inflation forecasts were little changed (2.5% in 2026, from 2.6%).
Stephen Miran voted for a larger 50bp cut, while Jeffrey Schmid and Austan Goolsbee dissented in favour of a hold, in line with the expectations that we set in our Fed preview, 5 December. The updated rate projections revealed that 4 non-voters would have also preferred to maintain rates unchanged. We have argued, that the 2026 voter rotation will further cement the Fed pausing its easing cycle in January (see RtM USD, 9 December). Powell specified during the press conference, that no one in the committee saw a rate hike as the most likely next policy change, as the views vary between holding rates steady and cutting further.
Markets are pricing a 20% probability for a January cut, which seems fair in light of the unusually large amount of key macro data releases in between the meetings. The median rate projections foresee 1x25bp cuts for both 2026 and 2027, unchanged from September. We make no changes to our Fed call and still expect the final two 25bp rate cuts in March and June.
Author
Danske Research Team
Danske Bank A/S
Research is part of Danske Bank Markets and operate as Danske Bank's research department. The department monitors financial markets and economic trends of relevance to Danske Bank Markets and its clients.
