15.12.20253 min
(In)dependence of the Fed: Our analysis following the December FOMC meeting
As widely expected, the Federal Reserve (Fed) lowered its policy rate for the third consecutive time, bringing the Fed Funds rate to a range of 3.5%–3.75%. We view this as a measured move: the Fed remained cautious and acted less aggressively than some market participants had feared.
Our key takeaways from the meeting are:
1.
Growing dissent: The number of dissenting votes was the highest since 2019, although the outcome could have been even more divided.
2. Wide dispersion in rate expectations: The 2026 dot plot shows a 200 basis point (bps) gap among FOMC members, highlighting significant uncertainty and disagreement over the balance between supporting the labour market and controlling inflation. Notably, one member projects six 25 bps cuts, while three others expect higher rates by end-2026.
3. High bar for further cuts: Chair Powell stressed the need for additional data—particularly on employment, before considering further rate reductions. Frequent references to 'neutral' (around ten times) underscore the Fed's cautious stance, especially given the recent government shutdown has delayed data releases.
Conclusion: one more cut under Powell – and then?
FOMC members anticipate only one additional rate cut in 2026, in line with our expectation of gradual normalisation. Markets currently price in two cuts, down from nearly three a few weeks ago.
- Based on our conviction that the economy and labour market remain resilient, we have consistently warned against overly aggressive easing expectations.
- Speculation about the next Fed Chair—particularly if aligned with a more accommodative administration—could still influence market pricing and policy direction. Political considerations may lead to further cuts, steepening the yield curve and weakening the dollar. We therefore remain cautious regarding interest-rate sensitivity and US dollar exposure in our portfolios.
- This view may evolve as new inflation and employment data become available.
Balance sheet management vs. quantitative easing (QE)
The Fed announced it will resume purchases of US Treasury securities as part of its balance sheet management—starting with $40 billion in Treasury bills—at least until April, just 12 days after ending quantitative tightening. While the Fed avoids calling this quantitative easing (QE), market reaction—namely a weaker USD and stronger gold—suggests otherwise: "If it looks like QE and smells like QE, it probably is QE." Regardless of semantics, this measure injects additional liquidity.
Fed independence: medium-term outlook
We believe the Fed's independence is not at risk over the medium term. In the short term, markets may remain cautious until the new Chair's policy stance becomes clear. We are confident the FOMC as a whole will continue to fulfil its mandate, regardless of leadership changes. While political pressure exists, history shows that any new Chair will be mindful of their legacy and the risks of policy missteps—especially in today's context of large fiscal deficits.
Final thoughts: the Fed's 'social' role
The dual mandate, maximising employment and maintaining price stability, remains a source of internal debate. Whether the Fed should cut rates increasingly depends on one's economic perspective: higher-income households may see little benefit, while lower-income groups could feel an immediate impact. Although not explicitly part of its mandate, the Fed's awareness of social inequality may become a more prominent theme in future policy discussions.
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