The Fed cuts rates, but its words are tougher than its actions

At the policy meeting on December 9–10, 2025, the Federal Reserve decided to cut interest rates by 0.25 percentage points, bringing the federal funds rate down to the 3.5–3.75% range. This marks:

• The third rate cut in 2025 (after September and October)

• The fifth cut in the current easing cycle, which began in September 2024

However, instead of signaling an aggressive easing path, the Fed emphasized a very cautious message:

• The dot-plot (the Fed’s interest rate projections) indicates only one more rate cut in 2026 and one in 2027, after which the policy rate would settle around its longer-run level of about 3%.

• Chair Jerome Powell made it clear that the Fed has not made any decision for the January meeting, and that the current rate is at the “upper end of the neutral range” – not particularly accommodative.

That’s why analysts are calling this a “hawkish cut”:

The Fed cuts rates, but at the same time says: “Don’t expect us to keep cutting aggressively.”

In market language, a “hawkish cut” is when a central bank lowers interest rates but keeps a strong anti-inflation stance and downplays expectations of further rapid easing.

Deep divisions inside the Fed – the highest level of dissent since 2019

One highly unusual aspect of this meeting was the degree of internal disagreement.

• The rate cut decision passed with a 9–3 vote, and 3 dissents is the highest level of opposition in an FOMC policy decision since 2019.

• Among those who dissented:

  • One member wanted a larger cut of 0.5 percentage points

  • Two members wanted no cut at all and preferred to keep rates unchanged

This reflects two clearly defined “camps” inside the Fed:

• The hawkish camp: more worried about inflation, prefers to keep rates higher for longer.

• The dovish camp: more concerned about a weakening labor market and growth, and wants deeper cuts to support the economy.

Beyond the voting members, several non-voting participants also appear unconvinced about cutting too fast. The dot-plot shows that in total, 7 out of 19 FOMC participants do not want any rate cuts next year – not a trivial number.

In short: the Fed is being pulled in two directions – fear of inflation vs. fear of economic slowdown. This decision is more of a temporary compromise than a unified conviction.

The Fed upgrades its growth outlook and accepts inflation above 2% for longer

Alongside the rate decision, the Fed released its updated Summary of Economic Projections (SEP):

• U.S. GDP growth for 2026 is now projected at around 2.3%, roughly 0.5 percentage points higher than the September forecast.

• Inflation (PCE) is expected to drift down to about 2.4% in 2026, and remain above the 2% target at least through 2028.

• The unemployment rate is projected to hover around 4.4%, higher than the lows seen in the previous boom period.

The underlying message:

1. The Fed is comfortable with growth that is “solid but not too hot” – enough to avoid recession, but not enough to fuel runaway inflation.

2. Inflation won’t cleanly hit 2% in the near term; the Fed is prepared to live with inflation somewhat above target for a few years as long as the trend is gradually lower.

3. There is no baseline scenario of rate hikes returning, unless a new shock forces the Fed’s hand; Powell also stressed that the Fed does not currently expect to raise rates again.

For investors, this paints a “middle-ground” picture:

• Rates are no longer at the extreme highs of the peak inflation-fighting phase.

• But this is also not a repeat of post-crisis ultra-easy money.

The Fed resumes bond purchases: real QE or just technical liquidity management?

Another important development: the Fed announced it will resume buying U.S. Treasury bills.

• The initial scale is about $40 billion in T-bills, starting on Friday of this week.

• This comes right after the Fed ended its balance sheet runoff (QT), which had shrunk the balance sheet from around $9 trillion to about $6.6 trillion.

The Fed describes this as a “technical reserve management” measure aimed at:

• Ensuring the system has sufficient reserves and liquidity, avoiding sudden spikes in money market rates.

• Keeping the effective federal funds rate closely aligned with the target range set by the FOMC.

However, for markets, the combination of ending QT + restarting Treasury purchases is easily interpreted as:

• A form of “QE-lite” – not a massive stimulus program like after 2008, but still a loosening of financial conditions compared with ongoing balance sheet tightening.

• Another layer of nuance: the Fed talks hawkish but is once again buying bonds.

This helps explain why, after the meeting, U.S. equities rose, Treasury yields fell, and the dollar softened slightly – taken together, markets viewed this decision as more benign than threatening, even though the official communication sounded tough.

Looking ahead to 2026: a narrow and bumpy easing path

Putting the pieces together, several core points emerge for 2026:

1. The Fed neither wants nor is able to return to the era of “endless free money.”

2. The path for rate cuts in 2026 is visibly narrow: just one more cut in the baseline Fed forecast, plus another in 2027.

3. The Fed is internally divided, and U.S. politics (including the question of who will succeed Powell) will make every rate decision in the next 1–2 years more sensitive and more closely watched.

For investors, the simple takeaway is:

The era of “whenever the Fed cuts, just buy everything” is over. Heading into 2026, it’s no longer only about the direction of rates – it’s about who can read the cycle, understand liquidity, and manage risk better.