Flashlight for the December FOMC blackout period: A contentious cut

Summary

We expect the FOMC to reduce the fed funds rate by another 25 bps to 3.50%-3.75% at its December 10 meeting. The FOMC will not have the October and November Employment Situation and CPI reports as initially planned, but the latest available data suggest continued softening in labor market conditions and receding inflationary pressures outside of tariffs.

The FOMC has grown increasingly split over its near-term course of action. Generally speaking, the Board of Governors has a dovish skew, while the regional Fed presidents—who do not all vote—lean more hawkish. Multiple dissents seem likely. While we expect opposition in both directions of the policy decision again, more dissents are likely to be in favor of keeping the policy rate unchanged.

A more hawkish post-meeting statement could be used to limit the total number of dissents. We expect the statement to signal a higher bar to additional rate cuts and to hint that a hold in January is most Committee members' working assumption.

To the extent that adjustments are coming to the Summary of Economic Projections, we suspect changes to 2025 economic forecasts will be in the direction of higher unemployment and lower inflation—consistent with another 25 bps rate cut at this meeting (see Table). Looking ahead to 2026, major changes seem unlikely. If the medians are to move, we think they are more likely to drift up a tenth or so for GDP growth and the unemployment rate, while edging down a tick for inflation.

Our expectation is that the median dot for 2026 will remain unchanged at 3.375%. That said, it would take just one participant at the current median of 3.375% moving their dot lower for the median to fall. Given the potential for a slightly higher unemployment rate and slightly lower inflation in the 2026 projections, we see the risks to the 2026 median dot as skewed to the downside.

With quantitative tightening (QT) having ended on December 1, attention has turned to when reserve management purchases will begin to preserve the Fed's ample reserve framework. We do not expect a decision at this meeting, and instead look for the start of reserve management purchases to be announced at the March 18 meeting.

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