December 10, 2025 FOMC: A Divided Fed, a Measured Cut, and a Market Leaning Toward 2026 Easing

The December 10 FOMC delivered a 25bp rate cut, bringing the federal funds target range to 3.50–3.75%. It was the third consecutive cut of the year, but the meeting was defined less by the cut itself and more by how deeply divided the committee was. Three dissents—two favoring no cut at all and one calling for a larger reduction—made this one of the most fractured votes of the current cycle. Powell acknowledged the division but framed the decision as a balanced step in an environment where “there is no risk-free path,” a phrase that set the tone for how markets and analysts interpreted the announcement.

The updated Summary of Economic Projections painted a cautiously optimistic macro backdrop. Growth expectations for 2026 were revised up to 2.3% from the previous 1.8%, while core PCE inflation projections edged slightly lower for both 2025 and 2026. The unemployment outlook remained stable around the mid-4% range. Despite improved growth, the median rate forecast showed only one additional cut by the end of 2026, keeping the projected year-end rate near 3.4%. In other words, macro conditions may be improving, but the Fed is not ready to endorse an aggressive easing cycle. Powell reinforced this with a repeated emphasis on upside inflation risks and lingering uncertainty in labor-market data, particularly given recent data reporting disruptions related to the government shutdown.

Markets reacted swiftly and decisively. Equities rallied across the board, with the S&P 500 pushing toward record levels and the Dow rising sharply—nearly 500 points at one stage—before settling near its intraday highs. Investors interpreted the meeting as a sign that the Fed’s tightening phase is definitively behind us, even if Powell avoided dovish commitments. Tech and AI-linked names outperformed as lower long-term yields revived the growth premium. Financial stocks showed mixed performance, reflecting the tension between lower rates and the still-uncertain pace of the 2026 policy path.

The bond market expressed a more measured response. The 10-year Treasury yield fell to around 4.15%, reflecting the market’s preference to price a slightly more accommodative 2026 path than what the Fed implied. Short-term yields dropped more noticeably, reinforcing expectations that at least one more cut is likely next year and that two cuts remain a plausible scenario, depending on the trajectory of inflation and labor demand. Global yields moved in tandem, with German bunds and Japanese government bonds also declining as investors priced in a softer U.S. rate environment.

The dollar weakened for a second consecutive week, with the DXY slipping against major currencies. Markets perceived the overall message as somewhat less hawkish than feared—growth is better, inflation is lower, and while the Fed is not promising swift easing, it has clearly shifted into a managed, data-dependent normalization phase. Asian currencies and short-duration credit assets were cited by analysts as likely near-term beneficiaries of a softer dollar and a slower pace of U.S. tightening.

Media coverage converged on a few dominant themes. Reuters emphasized the “sharply divided” nature of the vote and the Fed’s signal of a pause with only one forecast cut in 2026. Bloomberg highlighted the unusual number of dissents and the upward growth revision, framing the meeting as hawkish in tone but dovish in trajectory. U.S. financial outlets repeatedly noted that this meeting revealed the most internal disagreement among policymakers this year, contextualizing the decision within a Fed still wary of inflation dynamics even as it steps gradually into easing.

Large financial institutions responded with their own interpretations of the 2026 path. Goldman Sachs maintained its view of two cuts next year, projecting a year-end rate closer to 3.00–3.25%. Wells Fargo’s investment research team argued that, depending on inflation progress, up to three cuts by the end of 2026 remain possible—more than the Fed’s baseline but consistent with a softer macro landing. J.P. Morgan remained cautious, assigning roughly a one-third probability to a recession in 2026 and therefore expecting a modest, one-cut scenario unless labor markets weaken significantly. Morgan Stanley echoed the possibility that the Fed may be forced into faster easing if labor conditions deteriorate, despite their base case of stable global growth around 3.2%. Across Wall Street, the consensus is clear: the direction is easing, but the Fed’s pace will be dictated by data, not pre-commitment.

Taken together, this meeting marks the continuation of a controlled transition. The Fed is acknowledging improved economic resilience while refusing to declare victory on inflation. Markets, however, are already trading the beginning of a gentle easing cycle, leaning toward one to two cuts in 2026 and pricing a benign macro environment for risk assets. This divergence—Fed caution versus market optimism—will likely define the first half of 2026. Each employment print, inflation release, and corporate earnings season will test whether the soft-landing narrative continues to hold.

The broader message is that the tightening era is effectively over, but the easing era will not be simple or linear. The Fed wants flexibility; markets want clarity. Between these competing forces, 2026 is shaping up to be a year where expectations, rather than policy alone, drive asset prices. For now, the combination of a modest rate cut, stronger growth projections, softening inflation, and a divided but directionally aligned FOMC has created a constructive backdrop for equities, a stabilizing setup for bonds, and a weaker dollar trend that may persist unless inflation surprises to the upside.