December 10, 2025 FOMC Report
A Divided Committee, A Measured Cut, and the Emerging 2026 Policy Path
1. Executive Summary
The Federal Reserve’s December 10 meeting delivered a widely expected 25bp rate cut, lowering the federal funds target range to 3.50–3.75%. While the action itself was consistent with market expectations, the internal dynamics of the committee and the tone of the communication revealed deeper shifts. Three dissenting votes underscored a policy debate that is far from settled. Updated economic projections offered a cautiously constructive picture: stronger growth, slightly lower inflation, and stable unemployment. Yet the Fed signaled only one additional cut through the end of 2026, a stance that contrasts with the market’s broader expectation for a more extended easing cycle. The outcome was a rally in equities, a decline in Treasury yields, a weaker dollar, and a wave of analytical commentary from major financial institutions attempting to calibrate the next year’s rate path.
2. The Policy Decision and Its Context
The Fed’s decision to cut rates for a third consecutive meeting reflected a balancing act between slowing inflation and moderating but still resilient labor market conditions. The dissent pattern was striking: two policymakers argued for keeping rates unchanged, citing persistent inflation risk, while one argued for a 50bp cut to pre-empt potential weakness in demand. This divergence highlights how uncertain the macro environment remains. Despite improved growth prospects, Powell emphasized in the press conference that the committee is operating without a “risk-free path,” acknowledging that decisions must navigate trade-offs between inflation control and labor market health.
The updated Summary of Economic Projections reinforced this message. Growth for 2026 was revised upward to 2.3% from 1.8%, suggesting that policymakers see momentum carrying further into the mid-cycle period. Core PCE inflation forecasts were lowered modestly for both 2025 and 2026, yet remained above the 2% target. Unemployment projections held around the mid-4% range, implying confidence that labor conditions can stabilize without sharp deterioration. Still, the median policy rate for 2026 was projected at roughly 3.4%, indicating only one additional cut after this meeting. The Fed chose not to validate market expectations for a more aggressive easing trajectory.
3. Powell’s Messaging and the Reaction Function
Chair Powell adopted a tone that blended guarded optimism with clear caution. He acknowledged encouraging disinflation progress but repeatedly stressed that inflation remains “somewhat elevated” and that the committee requires further confirmation of downward momentum. He also pointed to gaps in labor-market data due to recent government shutdown-related reporting delays, noting that certain indicators present only partial signals. Powell’s remarks on policy risk management were among the most discussed aspects of the briefing. His statement that “there is no risk-free path” suggested that the Fed remains wary of cutting too quickly, even as it distances itself from the restrictive stance of prior years.
Market participants interpreted this as a deliberate effort to temper expectations. Powell did not commit to any pre-set path for 2026, emphasizing that decisions will depend on incoming data. Nonetheless, his acknowledgment that policy is moving into a more balanced phase signaled that the era of aggressive tightening is definitively behind the committee.
4. Market Response: Risk Assets Strengthen, Yields Decline, Dollar Softens
Financial markets reacted decisively to the combination of a measured rate cut and improved economic projections. U.S. equity indices surged, with the S&P 500 approaching all-time highs and the Dow posting a significant gain during the session. Technology and AI-related sectors led the advance, reflecting renewed appetite for duration-sensitive growth equities as long-term yields retreated.
In the Treasury market, the 10-year yield fell toward the low 4.1% range. The decline was modest but meaningful, indicating that investors continue to anticipate additional easing beyond what the Fed explicitly projected. Shorter-term yields moved down more sharply, consistent with expectations for at least one further cut in 2026 and the possibility of two cuts if inflation continues to moderate. Global bond markets moved in parallel, with yields in Europe and Japan slipping as capital adjusted to a softer U.S. rate outlook.
The foreign exchange market reinforced this narrative. The dollar weakened for a second consecutive week, with the DXY softening against major currencies as investors digested the Fed’s shift toward a slower, more calibrated normalization phase. Analysts highlighted potential support for Asian currencies, emerging market debt, and short-duration credit as beneficiaries of a softer dollar coupled with stable global growth expectations.
5. Media Framing: Division, Caution, and an Uncertain 2026
Global media coverage centered on the committee’s internal division and the cautious nature of the policy path. Major outlets described the meeting as the most divided of the year, noting that the combination of dissents and the conservative rate path reflected deep unease within the Fed about committing to future easing. Headlines emphasized that while the Fed cut rates, it signaled neither urgency nor confidence in accelerating the pace next year. Powell’s tone was widely interpreted as “hawkish in delivery, dovish in direction,” an approach aimed at maintaining optionality while acknowledging macroeconomic progress.
Commentary also focused on the Fed’s upward revision to 2026 growth and modest reduction in inflation estimates. Several outlets concluded that the committee was attempting to shape expectations carefully, avoiding both premature easing narratives and fears of renewed inflation pressure.
6. Wall Street and Major Banks’ Interpretation of the 2026 Path
Large financial institutions responded with detailed assessments of how the 2026 policy landscape may unfold. Their perspectives offer a window into how institutional capital is framing the next stage of the cycle.
Goldman Sachs reiterated its expectation of two rate cuts in 2026, projecting a year-end target range closer to 3.00–3.25%. Their analysis suggested that inflation progress and labor market normalization justify a more extended easing cycle than the Fed’s baseline.
Wells Fargo’s research division argued that the Fed’s SEP likely understates the potential easing that could occur under a benign inflation scenario. They noted that, depending on realized data, as many as three cuts by the end of 2026 remain plausible, even though this exceeds the committee’s median projection.
J.P. Morgan adopted a more cautious stance, estimating a non-trivial probability of recession in 2026 and suggesting that the Fed would likely cut only once next year unless labor conditions weaken meaningfully.
Morgan Stanley maintained a constructive global growth outlook but emphasized that if labor-market stresses emerge, the Fed could be compelled to ease more aggressively than currently projected.
Collectively, these views highlight an important dynamic: the consensus direction is easing, but expectations diverge sharply around timing, magnitude, and macro triggers. Markets currently sit closer to the optimistic end of this spectrum, while the Fed is positioned near the conservative end.
7. Strategic Implications for 2026: The Year of Expectation Management
The December meeting clarified that the tightening cycle has ended, but it also signaled that the easing cycle will not follow the rapid, aggressive pattern of past downturns. Instead, 2026 is likely to be shaped by expectation management: the interplay between market optimism about a soft landing and the Fed’s insistence on data dependence. Asset prices may oscillate as inflation releases, employment data, and corporate earnings update the probability of deeper easing.
For risk assets, the outlook remains favorable in the near term. A stable growth backdrop combined with lower policy uncertainty and moderating yields provides a constructive foundation for equities and credit. For fixed income, the long end may continue to trade within a declining but volatile range, sensitive to inflation surprises. The dollar’s trajectory will depend heavily on whether the U.S. maintains growth outperformance or whether global yields converge downward.
8. Conclusion
The December 10 FOMC meeting marked a subtle but important turning point. The Fed cut rates, signaled improved growth expectations, and acknowledged incremental progress on inflation. Yet the committee remains cautious, divided, and unwilling to commit to a sustained easing path. Markets, in contrast, are leaning toward a more benign scenario for 2026, where inflation moderates further and growth decelerates without contraction.
This divergence sets the stage for a year where expectations, not just monetary actions, drive markets. The Fed has confirmed the end of the restrictive era, but it has not embraced a fully accommodative stance. As 2026 unfolds, the debate will center not on whether the Fed will ease, but on how quickly and under what conditions. For investors, policymakers, and analysts, understanding this gap between the Fed’s signals and the market’s optimism will be the defining challenge of the next phase of the cycle.