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Market Analysis
FOMC 2025: The Hawkish Cut That Could Reshape Early 2026
Dec 10, 2025
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Ahead of the Federal Reserve’s final meeting of 2025, I wanted to share a consolidated research brief summarizing the key developments, risks, and market implications highlighted across major outlets. The purpose is to frame expectations for Wednesday’s rate decision and outline the potential macro-market pathways into early 2026.
1. Base Case: A Third 25 bps Cut but a “Hawkish Cut”
Across all sources, consensus now leans toward a 25 bps rate cut, taking the Fed Funds range to 3.50%–3.75%.
However, the tone is expected to be cautious, with Powell emphasizing no preset path for further easing.
However, the tone is expected to be cautious, with Powell emphasizing no preset path for further easing.
- The committee remains deeply split:
- Doves see labor market risks and want insurance cuts.
- Hawks warn inflation remains too sticky above 2%.
- Even if they cut, Powell is expected to push back against expectations of continuous cuts in early 2026.
This is why markets refer to the outcome as a “hawkish cut”, easing paired with stricter forward guidance.
2. Data Blind Spots After the Government Shutdown
The record-long U.S. government shutdown created a unique challenge:
- Missing: October CPI, October unemployment, full November data.
- Upcoming: JOLTS (Dec 9) and Employment Cost Index (Dec 10) will heavily influence the discussion.
The Fed is operating with a clouded economic picture, especially regarding real-time inflation progress.
3. Labor Market: Stabilizing, But Softening Beneath the Surface
Recent indicators show:
- Hiring is slowing
- Layoffs are ticking up
- Job openings are little changed
- Unemployment rose last reading due to higher participation
Economists note this is not a reinvigorated labor market, reinforcing the argument for a precautionary cut.
4. Inflation: Still Too High for Comfort
Key insights:
- Core inflation remains around 2.8%, well above 2%
- Tariffs are keeping certain prices elevated
- Several Fed members argue cutting now risks re-igniting inflation dynamics
Inflation progress has been limited in 2025, which explains the hesitancy among hawkish members.
5. FOMC Dynamics: The Most Divided Committee in Several Years
The December meeting is notable for:
- Expected dissent on both sides (cut vs. no cut)
- A highly anticipated Dot Plot update reflecting disagreement in 2026 policy paths
- John Williams’ (NY Fed) recent speech signaling support for one more cut, usually implying Powell’s endorsement
Even former officials (Blinder, Mester) highlight how difficult consensus will be.
6. Market Implications of a Cut
A third cut would flow through to:
Consumers
- Lower mortgage rates
- Lower auto and credit card borrowing costs
- Slight pressure on high-yield savings returns
- More accessible HELOCs and small business loans
Labor Market
- A supportive signal for hiring during a slowdown
- Potential easing of financing stress for SMEs
Market Positioning
- Equities may respond positively unless Powell tempers expectations sharply
- Bond yields could fall modestly but remain sensitive to forward guidance
- USD reaction will hinge on the tone:
- Hawkish cut → supports the dollar
- Dovish hints → weaker dollar into year-end
7. What to Watch in Powell’s Press Conference
Expect markets to focus on:
1. The phrase “in a good place.”
If Powell uses it, it signals reluctance to cut again soon.
If Powell uses it, it signals reluctance to cut again soon.
2. His description of dissenting views.
3. Revised economic projections, especially unemployment and inflation.
4. Balance sheet signals:
Some expect the Fed to announce an end to QT and potentially prepare for limited bond purchases (but not full QE).
Some expect the Fed to announce an end to QT and potentially prepare for limited bond purchases (but not full QE).
8. What This Means Going Into Early 2026
Base case for 2026:
- A prolonged pause after this cut
- Inflation slowly drifting lower but still sticky
- A highly political environment as Powell’s term ends in May
- Potential nomination of a new Fed Chair by President Trump, likely with more pro-cut tendencies
Markets should expect a slower, more fragmented easing cycle, not a straight line of cuts.
