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The critical meeting of the Federal Open Market Committee (FOMC) commenced today, Tuesday, December 9, and will conclude tomorrow, Wednesday, December 10, with the announcement of the Central Bank’s latest monetary policy decisions. This meeting, the last of 2025, is viewed as an event of paramount importance, as it lays the final foundation for a turbulent year in which the US economy fluctuated between new headwinds in the labor market and inflation driven by tariffs. Crucially, it draws the roadmap for welcoming 2026 amidst significant anticipation on Wall Street.
Markets are keenly awaiting the US Central Bank’s decision, not only for the expected interest rate cut but for the crucial forward-looking signals that will culminate in the “Summary of Economic Projections” (SEP), or the “Dot Plot,” which reveals the bank’s expectations for the Federal Funds Rate at the end of 2026.
Near-Certain Cut… and Division over the Pace of Easing
Markets widely anticipate that the Fed will approve a third consecutive interest rate cut of 25 basis points (bps). The probability of this cut is highly priced, reaching a near-certain 95% and exceeding 95% in some estimates, which would narrow the target range for the Federal Funds Rate to between 3.50% and 3.75%. Although the decision appears virtually certain, the December meeting is described as one of the most difficult. The significance and difficulty lie in the most important event investors are awaiting: the signals the Central Bank is expected to broadcast regarding the pace of quantitative easing in the next phase, and whether the upcoming easing cycle in 2026 will be rapid or gradual.
Economic Justifications for the Cut: Weak Labor Market and Stable Inflation
Expectations for the rate cut are based on several strong economic arguments, notably the slowdown in job growth failing to keep pace with the growth in labor supply, and the rise in the unemployment rate. Experts indicate that other indicators of labor market tightness have, on average, declined significantly, and some alternative measures of layoffs have recently begun to rise, representing a “new and perhaps more serious downside risk.” The labor market showed a significant and surprising decline in November, with the private sector losing about 32,000 jobs—the largest drop in over two and a half years—contrary to expectations of an increase. Small businesses, which employ nearly half of the US workforce, were the most affected, seemingly cutting or freezing hiring due to rising costs and economic uncertainty. These indicators coincide with the manufacturing Purchasing Managers’ Index (ISM) for November falling to 48.2 points, its lowest level in four months.
On the inflation front, data for the Core Personal Consumption Expenditures (PCE) index, the Fed’s preferred measure, aligned with expectations, recording a monthly increase of 0.3% and an annual increase of 2.8%. This data points to relative price stability and provides “additional cover” for the Fed to cut the interest rate in its meeting. Personal spending also rose by 0.3% monthly, and personal income exceeded expectations by rising 0.4% monthly. Conversely, positive data supporting tightening came from ADP private sector employment data and a rise in the Job Openings and Labor Turnover Survey (JOLTS) in October to 7.670 million job openings, which explains the highly controversial nature of the meeting.
2026 Outlook: The “Dot Plot” and the Direction of Monetary Policy Winds
Attention is strongly focused on two key aspects to determine the trajectory of 2026. First, the Dot Plot: where the Fed’s Summary of Economic Projections (SEP) will reveal its official expectations for the Federal Funds Rate at the end of 2026. Economists generally anticipate further rate cuts for 2026, although the timing remains uncertain. Second, the political replacement for Fed Chair Jerome Powell.
Fed Chair Jerome Powell’s press conference is an event of high impact, especially after President Donald Trump announced that he would reveal his choice for a new Federal Reserve Chair in early 2026. Economic reports have indicated that the Director of the National Economic Council, Kevin Hassett, is considered the frontrunner to succeed Powell in the position. Hassett’s potential nomination is viewed as potentially negative for the dollar, as he is considered the most dovish among the potential candidates.
More seriously, it raises questions about the independence of the Fed, given his explicit support for Trump’s rate-cutting stance. Additionally, the White House intends to push for a new rule stipulating that regional Fed Bank presidents must have lived in their regions for at least three years before taking office—a move aimed at promoting local representation, but which markets view as a potential interference in the affairs of the independent Central Bank.
Global Market Reactions Ahead of the Decision
Market reactions ahead of the decision are characterized by volatility and caution, with varied movements in currencies and bonds:
US Dollar: The US Dollar suffered significant losses last week due to rate cut expectations. Despite a slight rise of about 0.2% today, Tuesday, ahead of the announcement, its gains remain limited in the short term amidst strong expectations for the upcoming easing cycle. This limited recovery is attributed to short-covering operations following previous losses, and to data showing an unexpected rise in the JOLTS index in October to a five-month high, which is viewed as a supportive factor for quantitative tightening and keeping rates higher for longer.
Treasury Yields: US Treasury yields stabilized in an upward trend, with the 10-year yield rising by more than 2 basis points to 4.168%. The 30-year yield also rose to 4.811%, and the 2-year yield rose to 3.579%. This rise is primarily based on rate cut expectations, given the inverse relationship between bond value and yield; as bond prices fall due to lower future dollar returns, their yields rise.
Stocks: US stock indices showed mixed performance today as the Fed meeting began, with the Dow Jones Industrial Average rising 0.3% and the S&P 500 rising less than 0.1%, while the technology-heavy Nasdaq 100 fell 0.3%. Stocks generally benefit from any potential signals of future rate cuts, as indices follow a simple rule: any potential indications of future easing are met with a stock rally (accommodative policy).
Yen and Bitcoin: In related developments, the Japanese Yen recorded a sharp drop against the dollar, falling to its lowest level in two weeks. This decline was triggered by comments from Bank of Japan Governor Kazuo Ueda, who suggested that the pace of increase in long-term Japanese government bond yields was “somewhat fast,” raising the possibility of the BoJ buying more government bonds—a measure falling under quantitative easing, which is negative for the currency. As for the Bitcoin cryptocurrency, it achieved a relative recovery, rising by about 3.4% after three days of decline, although some investors remain concerned about it falling below the $90,000 level again.
Analysis of Interest Rate Cut Impact on Investments
The expected interest rate cut by the Federal Reserve in December 2025 is generally considered a positive step for investments, as it reduces borrowing costs and makes riskier assets like stocks more attractive compared to fixed-income investments such as bonds or savings accounts. According to analyses from Morningstar, lower rates reduce the required returns to justify investment in risky assets, leading to higher stock prices, as seen in previous cycles where cuts led to growth in indices like the S&P 500. However, this cut may come with a cautious tone, limiting market rallies, especially if projections indicate a slowdown in 2026. For investors in high-yield deposits or certificates, the cut will lead to lower returns, while it benefits borrowers, such as homebuyers, through lower mortgage interest rates. It may also boost investments in real assets like real estate or commodities, though with the risk of reigniting inflation if the cut is too quick, which could negatively impact long-term investments.
2026 Rate Path: Cautious Forecasts and Potential Slowdown
Regarding the rate path for 2026, the “Dot Plot” in the December meeting is expected to show an update indicating a slower pace of cuts, with a median Federal Funds Rate projected to reach about 3.4% by year-end, according to the latest September data, which suggested only two additional cuts. Economists, as per Bloomberg surveys, expect two more cuts in 2026 starting in March, reflecting a shift toward a more neutral policy with projected economic growth of 2%, but with inflationary risks that could lead to a halt in rate cutting if inflation rises above 2.8%.
A J.P. Morgan report suggests only one cut in 2026, focusing on stability, which could temper easing expectations in the markets and strengthen the dollar against other currencies. This cautious path aims to avoid recession but depends on developments in fiscal and geopolitical policy, and may change with any shifts in Fed leadership.
Key Takeaways Summary:
Expected Cut: A 25 bps rate cut is expected at the December 2025 meeting, making it the third consecutive cut, but with cautious signals pointing to a slowdown in pace in 2026 due to concerns about reigniting inflation.
Main Impacts: This cut may support short-term growth amidst a labor market slowdown but reflects divisions within the Committee, with the possibility of a dissenting vote from some members, and potential impact on Fed independence amid possible political changes.
2026 Outlook: The Dot Plot is expected to indicate only one or two cuts, suggesting a more neutral policy, with projected economic growth of 2.0-2.2%, but with inflationary risks remaining.
Economic Context: The decision comes amid mixed data, with the ADP report showing an unexpected loss of about 32,000 jobs in November 2025, reflecting weakness in the labor market, while inflation remains at 2.8% annually, above the 2% target. This supports the cut but is accompanied by warnings against the need for further immediate cuts.
Market Effects: Markets have seen volatility, with 10-year Treasury yields rising to about 4.17%, and the dollar recently declining before a slight recovery. Stocks are mixed, with the Dow Jones up 0.3%, while Bitcoin recovers by 3.4% after a slump. The Japanese Yen retreats against the dollar due to Bank of Japan policies.
Future Challenges: With the potential replacement of Jerome Powell by a candidate like Kevin Hassett, who leans toward easing, political pressure on the Fed’s independence may increase, affecting market confidence.
