Xiao Cui, Senior Economist Pictet Asset Management.
The FOMC voted 9-3 to cut the fed funds rate to 3.5%-3.75%. Regional Fed presidents Schmid and Goolsbee dissented in favor of no cut, and four other officials registered soft dissents with their 2025 dots. Governor Miran dissented in favor of a 50bps cut. The median 2026 dot stayed at one cut as expected. The views among officials are highly split with seven officials forecasting no cut and eight officials forecasting two or more cuts.
Both the policy statement and Chair Powell signaled a pause in the cutting cycle, but this hawkish shift was likely already priced in before the meeting. Powell noted the fed funds rates is “within a broad range of estimates of its neutral value” and the FOMC is “well positioned to wait to see how the economy evolves”. This is more hawkish than his prior assessment that “policy is moderately restrictive”. Powell already downplays the importance of upcoming data, saying the household survey and CPI data may be distorted due to technical factors. This suggests a hold should be the base case for the January FOMC, with a high bar for the data to surprise the Fed into a cut.
The FOMC upgraded its growth projection for 2026 (around half of the upgrade is due to the reversal of the government shutdown), lowered slightly its inflation estimates, and kept its unemployment forecast unchanged. Chair Powell appears optimistic about the growth outlook, citing productivity increases quite a few times during the press conference.
We continue to think Chair Powell is on the dovish end of the current FOMC. He noted that the Fed has made progress on non-tariff inflation, and that inflation will peak in Q1 absent new tariffs. He also suggested recent average nonfarm payrolls growth of 40k is likely overestimated (based on past benchmark revisions) and the underlying pace is close to negative 20k.
We maintain our expectation of two cuts in 2026, at the March and June meeting, which are more front-loaded relatively to market pricing. The Fed maintains an easing bias as Chair Powell suggested a hike is not in anyone’s base case. Although we expect inflation to increase slightly from here, non-tariff inflation is likely to stabilize or even decline. With risks to the labor market still tilted to the downside, theres scope for the Fed to bring rates a bit more closer to the median estimate of a 3% neutral rate.
The Fed announced purchases of T-bills of $40bn per month, starting Dec 12,. The announcement was both earlier and larger than expected, bringing in a dovish element to the meeting. Chair Powell did note these reserve-management purchases were “for the sole purpose of maintaining an ample supply of reserves over time”, and the decision is “completely separate” from monetary policy. He noted the amount of purchases is likely to be elevated going into April 15th, the tax day, as reserves drop sharply and temporarily, but the purchase amount could fall significantly afterwards. He noted a monthly pace of $20-25bn to be consistent with the secular growth of the balance sheet.
