The Federal Reserve cut rates at its December meeting as expected, shifting to a “wait and see” approach. During the press conference, Chair Powell noted that policy now sits within a “range of plausible estimates” of neutral — an update from earlier comments that it was moving “toward neutral,” which signals a slightly more hawkish stance.

Dissenting views in both the rate-cut vote and the “Fed Dots” highlight growing divisions among policymakers. Nine of twelve members backed the cut, but opinions on inflation and employment risks remain split. The median forecast still projects one cut in 2026 and another in 2027, yet the committee is divided: seven members want to keep rates unchanged all year, while eight favor at least two cuts.

Coming into the December meeting, markets were widely expecting a “hawkish cut” — a December rate cut paired with fewer cuts projected for 2026 and 2027 — and that scenario played out. The surprise came from the Fed’s announcement of Treasury bill purchases for reserve management. While these operations aim to maintain liquidity and stabilize money markets and do not signal further easing, they still effectively inject liquidity into markets and the economy and offset the rising T-bill share of Treasury issuance. The timing of these purchases, starting on December 12, was also unexpected, as balance sheet expansion was not expected for several months. Investors interpreted these actions as dovish. The market response included a bull steepening of the yield curve, a weaker dollar, and higher risk asset prices.

Additionally, Powell’s press conference leaned dovish on growth concerns while noting that inflation has “eased but remains somewhat elevated,” with most of the overshoot tied to tariffs — a one-time shock expected to peak in early 2026 and fade thereafter. Excluding tariffs, price pressures already sit near the low 2% range, suggesting underlying inflation is close to target. Powell struck a cautious tone on jobs, warning that payroll gains may be overstated and could turn negative, while the labor market faces “significant downside risks.” His remark that “it doesn’t feel like a hot economy” underscores the Fed’s pivot toward growth risks and explains today’s quarter-point cut.