Fed: A Rate Cut for Christmas, but a Mixed Message for 2026
Just a few days before Christmas, the Federal Reserve lowered its key interest rates by 25 basis points, bringing them to a range of 3.50% to 3.75%. This move was anticipated but takes place amid internal division, macroeconomic uncertainties, and increasing political pressure.
A Divided Fed
The third consecutive rate cut is not unanimously agreed upon: nine FOMC members voted in favor, but two wanted to maintain the status quo, and a third advocated for a more significant reduction of 50 basis points. This divergence highlights the challenge of interpreting American economic signals at the year's end. The economy is performing better than expected, inflation is receding but remains above the target, and the labor market shows signs of cooling without a sharp downturn.
The situation is even more delicate due to the long shutdown of over forty days, which deprived the Fed of a substantial amount of key data, making economic analysis less reliable. Powell acknowledged this: « We are moving forward in a situation where the lack of comprehensive data increases uncertainty. » This rare admission reinforces the notion that the Fed is moving towards a decidedly data-dependent policy mode.
The new economic projections nevertheless provide a framework: expected growth of 2.3% in 2026 (compared to the previous 1.8%), inflation reduced to 2.4% (from 2.6%), and unemployment stable at 4.4%. These figures reflect a still robust American economy but are diverse enough to justify divergent interpretations among governors.
The essential question remains the dynamic of the labor market, which Powell explicitly identified as the determining factor for upcoming decisions. According to him, the demand for labor « has clearly weakened, » but the rate cuts initiated in 2025 have helped stabilize the situation. In other words, the Fed considers the slowdown real but manageable, provided the signals do not deteriorate further.
A Cautious Message Amid Political Pressure
Powell's ambiguous speech was particularly notable regarding the future of the cycle. The Fed chairman did not rule out another rate cut as early as January, while adopting a deliberately cautious tone: the institution wants to maintain the necessary flexibility to adjust its decisions based on data. This stance comes as politics increasingly openly enters the monetary debate. President Donald Trump again commented on the Fed's policy this week, noting that « inflation is falling significantly » and suggesting that the central bank should act more quickly. The appointment of a new Board member by the Trump administration, coming in spring 2026, could heighten this institutional pressure.
The dot plot reveals apparent stability: the median projection still foresees an additional rate cut in 2026, followed by another in 2027. However, several members have raised their inflation expectations, which could delay the easing trajectory if upcoming indicators prove less favorable. The Fed finds itself in a paradoxical situation: it acknowledges that monetary policy is close to neutrality, but cannot yet affirm that the disinflation cycle is firmly established.
One point surprised analysts: the institution stated it is ready to purchase short-term Treasury securities if necessary to maintain an adequate level of reserves in the banking system. Powell emphasized that this is not a return to quantitative easing, but rather a technical tool aimed at stabilizing liquidity. For the markets, this is a positive signal, particularly for the short-term dollar credit segment.
Immediate Impact and Forward-Looking Strategy
The immediate impact of the announcements was clear: the dollar fell, US sovereign yields declined, and stock markets rose, particularly the segments outside of mega-cap stocks that benefit more from monetary support. Portfolios exposed to USD bonds and American mid-cap stocks were the first to benefit.
However, investors need to account for a new factor: the Fed is no longer following a predefined path. Its strategy now relies on three pillars: the labor market, inflation dynamics, and financial stability, without a clearly stated hierarchy. Powell's message, more nuanced than expected, reflects a desire to keep all options open, at the risk of clouding the clarity of monetary policy.
This content has been automatically translated using artificial intelligence. While we strive for accuracy, some nuances may differ from the original French version.
