Fed Cuts Rates for Third Straight Meeting as 2026 Policy Guidance Becomes the Market’s New Obsession

The Federal Reserve delivered another 0.25% interest rate cut at its December 10 meeting, marking the third consecutive reduction in 2025 and lowering the federal funds rate to 3.5%–3.75%. While the rate move was widely expected, the real headline came from the Fed’s 2026 guidance, which sharply shifted market expectations for the year ahead.

The decision caps an aggressive easing cycle aimed at balancing cooling inflation with a labor market that, although resilient, shows signs of softening.

Third Rate Cut Caps Historic 2025 Easing Cycle

The Fed’s December cut follows similar quarter-point reductions in July and October. Markets priced in a 90% likelihood of another reduction heading into the announcement, according to futures data.

Fed Chair Jerome Powell emphasized the delicate balancing act facing policymakers. Inflation continues to trend toward the 2% target, but risks remain. Employment growth has slowed, signaling caution. The central bank reinforced its commitment to supporting economic stability while avoiding renewed inflationary pressure.

The new rate range marks a dramatic shift from the 5.25%–5.50% peak earlier this year, representing one of the most meaningful downshifts in monetary tightening since the pandemic era.

2026 Fed Projections: Fewer Cuts Than Expected

The most significant surprise in the announcement came from the Fed’s updated Summary of Economic Projections, commonly known as the dot plot.

Officials now project only two rate cuts in 2026, a notably restrained forecast compared with investor expectations of three to four cuts.

Fed Rate Guidance Snapshot

Major banks split in reaction. Goldman Sachs forecasts a slightly deeper easing path. Pantheon Macroeconomics expects three cuts in 2026, while Deutsche Bank anticipates only one. The divergence reflects uncertainty around inflation, economic resilience, and global financial stability.

Fed Signals a Pause in 2026 — With Internal Division

For the first time in months, the Fed’s messaging turned more hawkish. Powell stressed patience, saying policymakers must ensure inflation does not re-accelerate.

The December vote revealed internal tensions. Governors Christopher Waller and Michelle Bowman expressed concerns about further easing, citing persistent pricing pressures. Their dissent underscores how divided the Committee remains on the pace of future cuts.

Markets React: Relief Turns to Anxiety

Markets initially rallied on news of the expected rate cut. But optimism faded once traders processed the tighter-than-anticipated 2026 guidance.

• Stocks: Brief gains, then a pullback

• Bonds: Yields climbed as expectations for rapid cuts faded

• U.S. Dollar: Strengthened on hawkish projections

• Mortgage Rates: Held above 6% but may drift lower depending on long-term yield movement

The mixed reaction highlights uncertainty as investors recalibrate expectations heading into 2026.

Will the Fed Be Forced to Cut More Next Year?

Analysts remain split. Some believe sticky inflation validates the Fed’s cautious approach. Others say economic slowdown signs — particularly in hiring and consumer spending — may compel deeper cuts than projected.

Powell reiterated that projections are not promises. Data will dictate the Fed’s path into 2026 as recession risks, geopolitical shocks, and shifting inflation trends remain central concerns.