Back to the Expansion Mode Before Defeating Inflation
Making sense of this week's FOMC
The Federal Reserve delivered its third rate cut of 2025, lowering rates by 25 bps at the December 10 meeting. While they sought to taper market expectations for further cuts, they also initiated balance-sheet expansion by $40B a month.
They expect the economy to improve in 2026, unemployment to decline, and inflation to not return to 2%. But they cut the rate and also started purchasing T-Bills, while also pairing that with hawkish rhetoric. Contradictory, conflicting, and misleading rhetoric. In this report, we aim to make sense of their actions and understand where the signal lies.
FOMC Debrief
Here’s a summary of the FOMC:
A 25 bps rate cut, the third this year
The Fed emphasized it will carefully assess the “extent and timing” of any further adjustments
Starting December 12, the Fed will begin buying U.S. Treasury bills
$40 billion in T-bill purchases over 30 days
Schmid and Goolsbee dissented, preferring no change, and Miran wanted a 50 bps cut
Powell tried to signal that rate cuts may be paused for now
Why did they cut but signal a pause? The core reason for this cut was that the labor market is weakening. As discussed in the prior report, job growth is slowing, hiring momentum is fading, and downside risks are becoming harder to ignore.
At the same time, inflation remains above target, and it has been for years, leaving the Fed exposed to public pressure about the cost of living. So the Fed split the difference, cut rates today to acknowledge labor market deterioration, while casting doubt on future cuts to keep inflation expectations anchored and appear to be doing “all they can” to make an impossible miracle happen. But this is a very shaky equilibrium, and any more bad news about the job market will force them to cut more aggressively, regardless of what inflation prints look like.
Rhetorical Contradictions? Chair Powell is clearly trying to pause expectations. This was a cut with a hawkish tone, but it came with more liquidity injection. It can get no more conflicting, which speaks to how confusing the data is for policymakers. It is critical for investors to distinguish rhetoric from ground reality. The signal is in the actions. They report they are concerned about inflation, but the rate continues to decline, and the balance sheet is expanding.
Our Expectation for 2026
