Divided Fed Delivers Rate Cut but Signals Slower Easing as Inflation Holds Above Target

Forward Guidance Signals a Slow and Limited Cutting Cycle The language in the post-meeting statement was recycled from December 2024, a period when the Fed paused rate reductions for nine months. That framing suggests the bar for further cuts is high. The latest dot plot reinforced this caution, showing only one projected cut in 2026 and one in 2027, leaving the funds rate near a 3% longer-run level. These projections were unchanged, underscoring reluctance to accelerate easing even as growth estimates shift.

Economic Outlook: Inflation Stubborn, Growth Revised Higher Officials upgraded the 2026 GDP outlook to 2.3%, reflecting firmer economic momentum. But inflation remains stuck above target, with the Fed’s preferred measure running at 2.8% in the latest available data. Policymakers still expect inflation to remain above 2% until 2028, limiting their willingness to cut quickly. Labor-market readings indicate a low-hiring environment, although private-sector layoff announcements above 1.1 million through November point to possible cooling ahead.

Balance Sheet Pivot Adds Liquidity at a Sensitive Moment The Fed confirmed it will resume Treasury purchases, starting with $40 billion in T-bills on Friday, following its decision to halt balance sheet runoff. Purchases are expected to remain elevated for several months. The move addresses recent funding-market pressures and adds liquidity during a period marked by delayed economic data due to the government shutdown.

Political Pressure Builds as Powell Nears Transition Chair Jerome Powell has only three meetings left before President Donald Trump’s nominee takes over. Prediction markets currently favor NEC Chair Kevin Hassett, viewed by some traders as more inclined toward aggressive easing. This political backdrop may reinforce caution within the current committee as it seeks to maintain credibility during the transition.

Market Forecast: Bearish for Rate-Sensitive Assets Given persistent inflation, rising dissent, and explicit signals of limited room for further cuts, the near-term outlook leans bearish for rate-sensitive assets. Traders should expect slower easing, reduced policy clarity, and elevated sensitivity to incoming inflation and labor data.