Fed Cuts and Enters “Wait and See” Mode

At its December meeting, the FOMC cut the Fed Funds rate by 25 bps to 3.5%–3.75%, which the market had priced in weeks in advance. The notable news from the accompanying statement and press conference, though, was a hint of a pause in January and an undetermined path from here.

The statement highlighted that “the extent and timing” of any further moves will depend on data, a new section of language which hadn’t appeared in recent statements, and which in the past has signaled an intention to pause. Chair Powell’s press conference reinforced that idea, as he noted repeatedly that the policy rate is broadly set around the neutral rate, making the Fed “well positioned to wait and see how the economy evolves.” That’s not a promise more cuts aren’t coming but does suggest the committee overall is inclined to sit tight and wait.

With the government shutdown impeding the collection and dissemination of labor market reports in October and November, we haven’t had a view into the labor market with official data since September’s belated payrolls report. November’s data will finally be released on December 16. If that data comes in on the weak side, as we currently anticipate, that should make a compelling enough case for a January cut. Over the coming months, we expect enough labor market softness to justify rate cuts to 3% or below. However, without data to work with, we cannot be that confident in any medium-term forecast.

Most of the committee anticipates cutting rates in 2026, with eight members clustering at one or two cuts, a few at three to four cuts, and Stephen Miran looking for six cuts. If the labor market holds up, the pace of cuts will be determined by progress on inflation, with 2025’s tariffs falling out of the year-on-year calculation as 2026 progresses. If the labor market does not hold up, that pace will be faster, and cuts will likely be deeper.

This meeting also included an unusual amount of dissent. Stephen Miran voted again for a 50-bps cut. Meanwhile district presidents Goolsbee and Schmid favored leaving rates unchanged. In addition to those two, another four committee members who are not currently voters indicated they preferred to hold rates steady, expressed by their figures for the 2025 dot plot.

Dissents have historically been meaningless at the Fed. However, should the next Fed chair lack credibility or independence, they will take on more meaning in the years to come. If the chair is perceived to be acting politically, the FOMC overall could refuse to go along with their wishes. That’s not a dynamic we’ve seen before, but the market may need to have its eye on that going forward.

Finally, the FOMC indicated it will begin expanding its balance sheet in order to ensure “ample” reserves in the banking system. That is not a surprise. It is also not Quantitative Easing. It’s a reserve management exercise, not a monetary policy decision, meant to keep enough liquidity in the system to allow money markets to function smoothly. That effectively depends on an amount of capital in the system relative to GDP—as GDP has grown, that amount of capital needs to grow too.

Looking into 2026, the first major Fed news will be who President Trump nominates as chair. Kevin Hassett, who headed the president’s Council of Economic Advisors for several years in the first term and who now serves as director of his National Economic Council, is currently in the lead according to media reports and prediction market odds. If he is nominated, we and the market will keep a close eye on his confirmation hearings and, if confirmed, his actions once in the seat.

Investing involves risk, including loss of principal invested.  This information does not constitute an offer or solicitation and should not be relied upon as investment or financial advice or a recommendation of any particular courses of action for all investors.  Equitable Advisors, LLC and its affiliates and associates do not guarantee the accuracy or completeness of any statements, statistics, data, opinions, forecasts, or predictions offered herein.