Divided Fed Delivers Rate Cut but Signals Slower Easing as Inflation Holds Above Target

Fed Cuts Rates but Signals Limited Room for Further Easing

The Federal Reserve delivered its third rate cut of the year, lowering the federal funds target range to 3.5%–3.75%, but the decision exposed widening disagreement inside the FOMC and a slowing path for any additional easing. For traders, the message was clear: the committee is hesitant to push policy much further, and internal divisions are increasing.

A Rare Three-Way Split Raises Policy Uncertainty

The 9-3 vote marked the most fractured meeting since 2019. Governor Stephen Miran pushed for a 50 bp cut, while Kansas City’s Jeffrey Schmid and Chicago’s Austan Goolsbee preferred to hold. Multiple “soft dissents” from nonvoting officials added to the sense of discord, with seven policymakers indicating they want no cuts at all in 2026. This widening policy divide elevates uncertainty around the Fed’s reaction function at a time when traders rely heavily on rate path clarity.

Forward Guidance Signals a Slow and Limited Cutting Cycle

The language in the post-meeting statement was recycled from December 2024, a period when the Fed paused rate reductions for nine months. That framing suggests the bar for further cuts is high. The latest dot plot reinforced this caution, showing only one projected cut in 2026 and one in 2027, leaving the funds rate near a 3% longer-run level. These projections were unchanged, underscoring reluctance to accelerate easing even as growth estimates shift.

Economic Outlook: Inflation Stubborn, Growth Revised Higher

Officials upgraded the 2026 GDP outlook to 2.3%, reflecting firmer economic momentum. But inflation remains stuck above target, with the Fed’s preferred measure running at 2.8% in the latest available data. Policymakers still expect inflation to stay above 2% until 2028, limiting their willingness to cut quickly. Labor-market readings indicate a low-hiring environment, though private-sector layoff announcements above 1.1 million through November point to possible cooling ahead.

Balance Sheet Pivot Adds Liquidity at a Sensitive Moment

The Fed confirmed it will resume Treasury purchases, starting with $40 billion in T-bills on Friday, following its decision to halt balance sheet runoff. Purchases are expected to remain elevated for several months. The move addresses recent funding-market pressures and adds liquidity during a period marked by delayed economic data due to the government shutdown.

Political Pressure Builds as Powell Nears Transition

Chair Jerome Powell has only three meetings left before President Donald Trump’s nominee takes over. Prediction markets currently favor NEC Chair Kevin Hassett, viewed by some traders as more inclined toward aggressive easing. This political backdrop may reinforce caution within the current committee as it seeks to maintain credibility during the transition.

Market Forecast: Bearish for Rate-Sensitive Assets

Given persistent inflation, rising dissent, and explicit signals of limited room for further cuts, the near-term outlook leans bearish for rate-sensitive assets. Traders should expect slower easing, reduced policy clarity, and elevated sensitivity to incoming inflation and labor data.