The Fed’s Pivot: December 2025 Rate Cuts and the Road to 2026

A Turning Point in U.S. Monetary Policy

The December 9–10 FOMC meeting closes a year defined by a controlled pivot from restrictive monetary policy to early-cycle easing. After two 25-basis-point cuts in September and October, markets expect a third in December, placing the federal funds rate at 3.50%–3.75%.

The Fed’s objective has shifted: preserve labor market stability while finishing the disinflation process without reigniting price pressure. With growth cooling from post-pandemic highs and early stress appearing in employment data, this meeting will set expectations for the 2026 policy path and determine whether the “soft landing” remains credible.

Economic Context: Moderation with Fragility

Economic momentum entering December is slowing in a controlled manner.

GDP growth is projected near 2% in 2025, reflecting resilient household consumption, but business investment has weakened as financing costs stayed elevated through most of the year.

Inflation has cooled sharply from 2022 levels. Headline CPI stabilizes near 3%, while core measures remain firm because of shelter and energy dynamics. Supply normalization continues to push goods prices lower, but reaching the 2% target is likely to extend into 2026.

The labor market—the Fed’s critical risk signal—is softening. Unemployment has moved into the mid-4% range, hiring momentum is fading, and wage growth has moderated to about 3.5%. Beneath headline numbers, job openings are declining, part-time work is rising, and average hours are slipping.

This combination—slower growth, cooler inflation, and loosening labor demand—creates room for another cut without jeopardizing inflation progress.


Market Expectations: December Cut Is Priced In

Rate markets show near-total alignment around a 25-basis-point cut in December. The focus has shifted to 2026, where futures imply three to four additional cuts, moving the policy rate toward 3.00%–3.25% by mid-year if the slowdown continues.

Expectations have stabilized after Q4 volatility as Fed communication emphasized labor risks and data-dependence over a preset easing schedule. Investors now view the Fed’s stance as dovish but disciplined, seeking balance rather than stimulus.


Policymaker Outlook: A Dovish Median, Hawkish Caution

The September SEP highlights the committee’s internal divide. The median projection anticipates 2–3 cuts through December, landing around 3.50%–3.75%, but several participants favored holding rates near 4%, driven by concern over sticky shelter inflation.

Chair Powell emphasizes that policy is “well-positioned” and fully data-driven.
Hawks warn that easing too early could destabilize inflation expectations.

Doves point to deterioration in leading labor indicators, arguing that waiting increases the risk of a harder landing.

The updated December SEP will show whether employment softness is shifting the internal consensus toward a clearer easing path in 2026.


Drivers Behind the December Cut

Four dynamics define the Fed’s calculus:

1. Labor Market Slowdown

Rising unemployment, slower payroll growth, and moderating wages reduce pressure on prices. Pre-emptive easing mirrors the Fed’s 2019 strategy to protect expansion before a downturn accelerates.

2. Inflation Progress

Core PCE near 2.6% signals meaningful progress but not completion. Shelter inflation may delay deeper cuts, making incremental steps the preferred approach.

3. Fiscal and Global Variables

Potential fiscal stimulus under the next administration could add near-term demand pressure in 2026. Synchronized central bank pauses reduce global rate divergence but expose U.S. policy to spillover dynamics.

4. Financial Conditions

Strong equity markets and a flatter yield curve reflect confidence in the soft landing, but tighter credit spreads and elevated valuations require caution to avoid imbalances.

Internal Fed modeling still assigns a high recession probability if rates remain restrictive for too long—another reason marginal cuts are viewed as risk management, not stimulus.

2026 Implications: A Shift to Maintenance Mode

A December cut formally transitions policy from peak tightening to maintenance mode, aimed at protecting growth while allowing inflation to complete its descent. Short-term effects should be positive: easing mortgage rates, improved corporate financing conditions, and renewed interest in long-duration assets.

GDP growth of 1.8%–2.0% in 2026 remains achievable if external shocks are limited.
The tone of Powell’s press conference will guide expectations:

“continued progress” could imply additional cuts ahead,

“pause to assess” may signal a slower path with two cuts in 2026.


Markets will watch how the Fed balances its dual mandate if the labor side weakens faster than inflation declines.

Conclusion: Precision Matters in the Final Phase

The December meeting represents a decisive moment in the Fed’s policy pivot. With inflation close to target, growth moderating, and labor metrics softening, a 25-basis-point cut is the logical next step.
However, the path beyond December will depend entirely on incoming data, not forecasts. Internal divisions on the FOMC reflect real uncertainty: the Fed must cut enough to stabilize labor conditions while preventing a resurgence in inflation.

If the soft landing is to hold, the Fed’s strategy through 2026 must remain measured, flexible, and data-anchored. December sets the framework; the economy’s response will determine the rest.

#FedRateCutPrediction #btc $BTC ‌