The Federal Reserve was back in focus this week as the US central bank announced its December rate decision. This rate move has been a topic of much debate in markets ever since the last cut was announced. Markets were anticipating a cut, with 88% odds of such a move in advance of the meeting. The Fed granted markets their Christmas wish and cut rates by 0.25%, bringing the Fed Funds rate range to 3.5% to 3.75% and marking the third cut for the year.

As has been the case with all past rate cuts, markets immediately turned to “what comes next.” Powell’s commentary stressed that this is a particularly challenging time for “data dependent” Fed, as much of that data has been delayed and/or scrapped due to the government shutdown.

Similar to last meeting, there were dissenting members (3) who did not agree with the 0.25% rate cut. During his press conference, Chairman Powell said this split vote illustrated the challenging position the Fed finds themselves in as their dual mandate moves in opposite directions – the labor market is showing signs of weakness while the inflation rate has once again ticked back above its 2% target. Balancing these two objectives remains a fine line to walk.

Powell also repeated himself by saying that future rate cuts are far from guaranteed. The path will remain dependent on the data, including any further signs of labor weakness or declines in inflation. The Fed is predicting only one cut in 2026, where markets are expecting at least two. “We’re well-positioned to wait and see how the economy evolves from here,” said Powell.

In addition to changes in labor markets and inflation, another complicating factor that is likely weighing heavily on the minds of the Fed and the market’s perceptions is the impending end of Powell’s term in May. The President continues to push to lower rates, calling Powell a “stiff” after today’s 0.25% cut and expressing his thoughts the cut could have been much larger. Many are expecting Trump to name his economic adviser Kevin Hassett given his close ties and allegiance to the President but no pick has been named. Powell didn’t speak to his successor but he did comment on his legacy, noting   “I really want to turn this job over to whoever replaces me with the economy in really good shape.”

A final item of interest from the meeting was the announcement the Fed would expand its balance sheet once more buying short-term Treasury securities ( $40 billion this month, tapering next month). This action is likely an effort to head off any possible pressure in overnight lending markets that are critical to the broader financial system. It was a quick change of action for a Fed that as recently as two weeks ago said it was letting securities roll off its balance sheet. These purchases are being dubbed reserve management purchases, not quantitative easing in disguise.

Markets reacted positively to the sum of the Fed’s news, even if the path from here remains far from certain. All told, it was nice for expectations to be met. As for where we go moving forward, that’s a topic for the new year!

Onward we go,