The Fed Sends Stronger Signals of a Rate Pause

• The Federal Open Market Committee cut rates by 25 basis points (bps) – lowering the federal funds target rate range to 3.5% to 3.75% – for a cumulative 175 bps in cuts since last September.
• The Summary of Economic Projections raised GDP, lowered inflation, and kept unemployment roughly unchanged in 2026.
• Three committee members dissented. Chicago Fed President Austan Goolsbee and Kansas City Fed President Jeffrey Schmid voted for no change in rates, while Fed governor Stephen Miran favored a 50-bps cut.

The Federal Reserve cut rates on December 10 in a meeting that was seemingly less unruly than I had expected.

As anticipated, the Fed acquiesced to market and political demands, cutting rates in what continued to be described as insurance against employment headwinds. However, Chair Jerome Powell said that we are now in a “plausible range” for estimates of the neutral rate, which is neither stimulative nor restrictive to growth and inflation. For me, including an explicit mention of neutral signals this may be the last cut we see from the current chair. Looking forward, we will see more data dependence, and that data may sway the Fed off a path of holding, but I believe the bar is high in both directions.

The biggest surprise to me was the relative calm from Powell – last meeting the chair suggested “strong disagreement” on the committee and clarified that December was far from a done deal. We didn’t hear similar language this time, though we did get one additional dissent in favor of no rate cut. I suspect the meeting was more contentious than the chair suggested.

The Fed also mentioned purchases of short-term bills as needed to introduce additional liquidity, though it was heavily caveated that markets should not view this as quantitative easing (QE), and we should trust the Fed on this point. Why downplay QE if your intentions are to be stimulative?

I think the December cut may prove to be a policy mistake. The Fed’s Summary of Economic Projections suggests stronger GDP, stable unemployment, and a decline in inflation. Going into 2026 we see more than $100 billion in projected higher tax rebates stemming from the One Big Beautiful Bill Act (OBBB), as well as economic stimulus from immediate capex expensing and continued strong demand. Lower rates, combined with stimulus from OBBB and tailwinds to demand are inflationary, period. March 2026 will represent a full five years since we have seen the Fed’s preferred inflation metric, core Personal Consumption Expenditures, at their target of 2%, and we are two to three years away from the Fed’s own projections of 2% inflation.  

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