Laura: So, what did the Fed do? I heard there were dissents! Drama?
Will: The FOMC lowered the target range by 25bp. No surprise. Although a month ago it would have been a big surprise. Chair Powell was asked about this in today’s press conference (the move from no rate cut expectations to a rate cut). He carefully dodged the question. And the dissents! This meeting wasn’t exactly a group hug. Stephen Miran wanted to go big with a 50bp cut (very much expected), while Jeff Schmid and Austan Goolsbee thought the best move was to do nothing at all—no cut. So, three dissents – a first time in a long time we have seen three dissents. It highlights that there is growing division between members on what side of the dual mandate they should be focused on – Jobs or Inflation. Both are not great. Who’s side are you on?
Laura: Did the Fed do anything else?
Will: Absolutely. The Fed rolled out reserve management purchases of T‑bills at an initial pace of ~$40bn per month. The first operation is this Friday, Dec 12. The goal is the help settle down the repo market going into year end and rebuild reserves. There has been lots of funding pressure in the repo market and nothing ruins a central banker’s holiday like a repo market tantrum. This should alleviate T‑bill supply pressures and support repo market functioning. They also note the Fed removed the aggregate limit on the Standing Repo Facility (SRF), strengthening the backstop even if take‑up remains modest. Translation: they are ready to throw the kitchen sink at funding stress; we hope they don’t need to.
Laura: What’s the Fed’s crystal ball say about the economy?
Will: The Summary of Economic Projections (SEP) points to modest growth improving to 2.3% in 2026 (caveat: they pushed 0.2% growth from 2025 to 2026 because of the government shutdown), unemployment at 4.4% in 2026 and 4.2% longer term, and headline PCE inflation moving to 2.4% (2026) → 2.1% (2027) → 2.0% (2028). Core PCE follows a similar glide‑path 2.5% in 2026 → 2.1% in 2027 → 2.0% in 2028). In other words: not promising a boom and hoping it is not a bust.
But don’t get too excited about the cutting cycle. Mirin must be frustrated. The SEP’s policy path, AKA the Dot Plot,: 3.4% in 2026 (one 25bps cut) and 3.1% in 2027 (one more cut). The message is very gradual normalization as inflation converges to 2% and labor conditions soften. The more interesting part was several Dot Plot participants wanted the policy rate to end 2025 at 3.75–4.00%—which would have meant no cut at today’s meeting. So, while the median moved down, the hawks are still circling.
Laura: What does all this mean for strategies?
Will: Chair Powell indicated that they are now at the top of the “neutral” rate range. We acknowledge that you never know when you are at neutral until well after you are there so let’s not get too excited. But we are getting close to the Fed being done. That is if the Chairman can hold this economy together to the end of his term and that’s starting to come into question as the labor market is showing more and more cracks. If we thought 2025 was uncertain, 2026 could take it to another level. We still like duration although that could change in the new year.
SEP Highlights (medians)
- Real GDP (QoQ/Q4 over Q4): 1.7% (2025), 2.3% (2026), ~2% thereafter.
- Unemployment (Q4 avg): 4.5% (2025) → 4.4% (2026) → 4.2% (2027–2028).
- PCE inflation: 2.9% (2025) → 2.4% (2026) → 2.1% (2027) → 2.0% (2028).
- Core PCE inflation: 3.0% (2025) → 2.5% (2026) → 2.1% (2027) → 2.0% (2028).
- Fed funds “appropriate” path: 3.6% (2025) → 3.4% (2026) → 3.1% (2027); longer‑run 3.0%.
Source: Federal Reserve, Bloomberg, as of December 10, 2025