jakiro
Main points
-
Detailed explanation of FOMC meeting decision-making: the deeper meaning of interest rate cuts and objections
-
Dual pressures on inflation and labor market
-
Immediate market reaction: risk asset rebound and bond correction
-
Monetary policy outlook for 2026: cautious easing and personnel changes
-
Economic Prospects: K-Shaped Divergence and Trade Friction
-
Global Impact and Market Enlightenment
On December 10, 2025, the U.S. Federal Open Market Committee (FOMC) announced at its last meeting of the year that it would lower the target range of the federal funds rate by 25 basis points to 3.50%-3.75%.This is the third rate cut this year, with a cumulative reduction of 75 basis points since September.Although this decision was in line with market expectations, internal differences were highlighted, with 9 votes in favor and 3 against, with the number of dissenting votes being the highest since September 2019.The meeting also announced that it would resume purchasing government bonds from December 12, with a scale of US$40 billion in the first month, to maintain adequate reserves.This marks the restart of balance sheet expansion after the Federal Reserve ended quantitative tightening (QT). Although officials emphasized that this is not quantitative easing (QE), the actual effect will be to inject liquidity and affect the financial market and the real economy.
The background of this meeting is complex: the U.S. economy faces multiple challenges in 2025, including data delays caused by the government shutdown, inflationary pressures and labor market slowdowns, and uncertainty about the Trump administration’s tariff policy.Federal Reserve Chairman Jerome Powell said at a press conference that economic activity is expanding at a moderate pace, the job market is solid but the unemployment rate has risen to 4.4%, and inflation is “slightly higher than expected.”He emphasized that the policy aims to balance the dual goals of employment and price stability, but future adjustments will be based on “careful assessment of data, outlook evolution and risk balance.”This statement was interpreted by the market as a “hawkish interest rate cut” – supporting growth in the short term, but cautious about further easing in 2026.
FOMCDetailed explanation of meeting decision-making: the deeper meaning of interest rate cuts and objections
The FOMC’s interest rate cut path is based on economic dynamics in 2025.According to the Federal Reserve’s Summary of Economic Projections (SEP), GDP growth in 2025 is expected to be 1.7%, the median unemployment rate is 4.5%, and core PCE inflation is 3.0%.These figures are unchanged from the September meeting, but the dot plot shows that only one 25 basis point rate cut is expected in 2026 and another in 2027, eventually approaching the long-term neutral rate of 3%.Seven officials expected no rate cuts in 2026, and one even hinted at a possible rate hike, reflecting the committee’s concerns about inflation risks.
The increase in dissent votes was the focus of the meeting.Opponents of a rate cut include Chicago Fed President Austan Goolsbee and Kansas City Fed President Jeffrey Schmid, who believe the current policy is loose enough; Fed Governor Stephen Miran, who supports a 50 basis point rate cut, is concerned about downside risks to the labor market.Powell responded that the objections were a “constructive discussion” but acknowledged that the decision was “very close” and highlighted the committee’s trade-off between inflation and employment.Historical data shows that the FOMC has had more than three dissenting votes only nine times since 1990, which usually indicates rising policy uncertainty.
In addition, the reserve management measures after the Fed announced the end of QT have attracted much attention.Since the launch of QT in June 2022, the balance sheet has shrunk from a peak of $8.5 trillion to $6.25 trillion.However, the pressure on the money market has increased recently, and the fluctuations in repurchase rates have intensified, and the Federal Reserve has judged that reserves have reached “slightly above adequate levels.”Therefore, the non-renewal of securities due to maturity will be stopped from December 1, and the purchase of government bonds will be launched from December 12, focusing on short-term government bonds with a maturity of less than 3 years, with an amount of US$40 billion in the first month, and subsequent adjustments as needed.This is considered “QE-lite” and is intended to calm liquidity fluctuations rather than stimulate growth.Federal Reserve officials emphasized that the move would avoid a repeat of the reserve shortage in 2019, but the market worried that it would restart asset price inflation.
Dual pressures on inflation and labor market
The trend of U.S. inflation in 2025 will be complex.The annual CPI rate rose to 3.0% in September, a slight rebound from 2.9% in August, and core CPI also reached 3.0%.The Cleveland Fed’s “real inflation” measure (which excludes volatility items) was at 2.51% in early December, indicating that core pressures were easing, but a rebound in energy prices (fuel oil rose 4.1% after gasoline fell 0.5% year-on-year) and the transmission effects of tariffs heightened uncertainty.Powell pointed out that if the impact of tariffs is excluded, inflation has fallen to “low 2%”, but emphasized that tariffs may cause “temporary” price increases, and the Fed will ensure that they are not embedded in expectations.
The labor market is the main reason for the interest rate cut.Non-farm employment growth slowed in October, the unemployment rate held steady at 4.4%, but the job vacancy rate fell to a low and the turnover rate fell to the lowest since early 2021 (1.8%).The recruitment rate has stagnated at 3.2%, showing a pattern of “low hiring, low turnover”.SEP predicts that the unemployment rate will fall slightly to 4.4% in 2026, but downside risks are rising.The government shutdown delayed the release of data, further clouding the outlook.Powell said that “significant downside risks” to the job market prompted this rate cut, but if growth is solid, the Fed may pause.
Tariff policy amplifies these pressures.The Trump administration will restart multiple rounds of tariffs in 2025, including 25% auto tariffs on Canada and Mexico and 10%-60% additional levies on Chinese goods.The International Monetary Fund (IMF) estimates that if the 10% universal tariff triggers retaliation, it will drag down 1% of US GDP and 0.5% of global GDP in 2026.JPMorgan Chase research shows that tariffs have led to an increase in corporate costs, which has been passed on to consumer prices. Core PCE is expected to rise to 2.5%-2.6% in 2026.Although Powell downplayed the long-term impact, he acknowledged that the “short-term impact is significant,” echoing the Fed’s “risk-free path” statement.
Immediate market reaction: risk asset rebound and bond correction
After the meeting, U.S. stocks rebounded quickly, with the Dow Jones Index rising 500 points, the S&P 500 closing up 0.5%, and the Nasdaq rising 0.3%.The 10-year Treasury bond yield fell to 4.14% from the opening 4.20%, reflecting rising liquidity expectations.Gold rose 0.5% to US$4,200 per ounce, while Bitcoin fell slightly but overall risk appetite recovered.Crypto markets saw this as a “liquidity catalyst,” with discussions on Platform X (formerly Twitter) showing traders anticipating inflows into riskier assets such as meme coins and AI-related stocks.
The bond market reaction was muted but concerned.The flattening of the short-term yield curve shows welcome to Fed purchases; the long-term side is wary of inflation.The prediction market Kalshi shows that the probability of Kevin Hassett becoming the chairman of the Federal Reserve has risen to 72%, which is higher than Kevin Warsh’s 13% and Christopher Waller’s 8%.Hassett is seen as more dovish and could accelerate easing in 2026, pushing yields further downwards.
Monetary policy outlook for 2026: cautious easing and personnel changes
Looking ahead to 2026, Fed policy will be driven by data, but divergence may persist.The dot plot suggests only one drop throughout the year, with Powell’s term ending in May and Trump’s nomination of a new chairman reshaping the direction.If Hassett takes office, he may push for more interest rate cuts to support growth, but will need to balance inflation.Deloitte predicts that if tariffs continue, GDP growth will be only 0.8% in 2026; under an optimistic scenario, AI investment will boost to 2.3%.
Balance sheet expansion is the key variable.If the US$40 billion/month purchases continue, the asset size will rise to more than US$6.5 trillion in 2026.Analysts such as Lyn Alden said that although this is not traditional QE, “monetary expansion is essentially the same” and will amplify the liquidity effect.X search shows that the market consensus is “money printing machine restarts”, but warns that excessive optimism may cause fluctuations.
Personnel changes add to uncertainty.Trump said the nomination was “imminent,” but it has been delayed multiple times.A CNBC Fed survey showed that 84% of respondents expected Hassett to take office, but only 5% viewed him as their first choice and were concerned about the Fed’s independence.Waller is likely to remain neutral if he remains in office; Warsh is more hawkish.No matter who takes over, political pressure will test the Fed’s credibility.
Economic Prospects: K-Shaped Divergence and Trade Friction
The U.S. economy is expected to recover moderately in 2026, with GDP growth of 1.8%-2.3%, higher than 1.7% in 2025.Consumer spending is stable, but the K-shaped differentiation is intensifying: high-income groups drive retail sales (Christmas shopping data has emerged), while the middle and lower classes are squeezed by utility defaults and rising food prices.Morgan Stanley predicts that AI investment will drive up productivity, but immigration restrictions and tariffs will drag down labor supply.
Trade war is the biggest risk.Tariffs have led to the reorganization of the supply chain, with China evading through re-exports to third-party countries, but the renegotiation of the USMCA in 2026 may cause new frictions.RBC Economic Research said tariffs will drive down employment and push up “mild stagflation” – growth below 2% and inflation above 2%.The IMF raised its U.S. outlook to 1.7% but warned of the risk of retaliation.Optimism factors include $8 trillion in money funds turning to dividend stocks in search of higher yields.
Global Impact and Market Enlightenment
The Fed’s shift to easing will spill over to the world.Emerging markets benefited from a weaker dollar, but the European Central Bank and the Bank of Japan were likely to follow suit with rate cuts.Crypto assets may become beneficiaries of liquidity. X semantic search shows that traders regard T-bill purchases as “invisible QE” and expect Bitcoin and others to rebound.
Overall, the December 2025 meeting marks the Fed’s transition from tightening to supportive policies, but dissent and uncertainty foreshadow volatility in 2026.Investors should pay attention to data releases (such as non-farm payrolls on December 17) and personnel announcements, and balance risk asset allocation.Although the economy is resilient, tariffs and differentiation may test the path to recovery.
