Fed's Internal Rifts Leave Dollar Stuck in Narrow Trading Band—What's Next?

The latest Federal Reserve minutes reveal a committee fractured over rate-cut strategy, creating an uncertain outlook for 2026 monetary policy. This internal schism has profound implications for USD positioning, likely keeping the currency locked in a constrained range as investors navigate conflicting policy signals.

The Split Vote That Changed Everything

When the Fed cut rates by 25 basis points in December—the third consecutive reduction—the headline masked deeper tensions. The vote split 9-3, but that figure obscures the real fragmentation: six additional officials openly opposed the move, arguing rates should hold in the 3.75%-4% band. Governor Steven Miran pushed for a steeper 50 basis point cut, while Chicago Fed President Austan Goolsbee and Kansas City Fed President Jeff Schmid called for no cuts at all.

The minutes released December 30 (covering the December 9-10 FOMC meeting) captured these fault lines starkly. One passage proved particularly telling: “A minority of participants who supported lowering policy rates at this meeting indicated that the decision was carefully weighed, or that they could have supported leaving the target range unchanged.”

Even among rate-cut supporters, skeptics lurked. This razor-thin consensus—what might be described as 3 divided by 12 when accounting for the full spectrum of dissenting views—suggests Chair Jerome Powell’s influence was decisive. Santander US Capital Markets’ Stephen Stanley noted: “The committee could have easily chosen either side, and the FOMC’s ultimate decision to ease policy clearly shows that Chair Powell pushed for the rate cut.”

The Core Dilemma: Unemployment vs. Inflation

The disagreement boils down to one fundamental question: Which threatens the US economy more—a deteriorating labor market or sticky inflation?

Doves pointed to November’s unemployment jump to 4.6% (the highest since 2021) as justification for insurance cuts. The minutes state: “Most participants believed that moving to a more neutral policy stance would help guard against the possibility of a severe deterioration in labor market conditions.”

Hawks countered with inflation concerns. The minutes captured their view: “Some participants noted the risk of inflation remaining elevated and pointed out that further rate cuts in the context of currently high inflation readings might be misinterpreted by the markets as a weakening of policymakers’ commitment to achieving the 2% inflation target.”

Powell attempted to thread this needle at his press conference, claiming the Fed had “taken sufficient action through rate cuts to prevent severe deterioration in the labor market, while maintaining rates at high enough levels to continue suppressing inflation.” The market wasn’t convinced. January 2026 rate-cut odds fell to just 15% following the minutes—a sharp pullback from pre-release expectations.

What Does 2026 Actually Hold?

The median Fed projection shows only one 25 basis point cut next year. But individual forecasts scatter wildly across a broader range. Market expectations diverge even more sharply, with investors pricing in at least two cuts for 2026.

This gap between official guidance and market expectations reflects the underlying uncertainty. New data arrivals over coming weeks—labor force statistics, CPI readings, employment reports—will likely determine whether the December cut marks the end of the easing cycle or merely a pause. The minutes explicitly noted: “Some participants who supported or could support keeping rates unchanged believe that the large amount of labor market and inflation data to be released over the next several meetings will help determine whether a rate cut is necessary.”

The Dollar’s New Reality: Range-Bound Volatility

This fractured Fed outlook has clear currency implications. The US dollar cannot sustainably plunge (hawkish dissenters prevent a dovish rout) nor rally sharply (the cutting cycle has commenced despite divisions). Instead, the greenback faces an extended period of range-bound trading, oscillating between competing narratives of recession risk and inflation threat until one data-driven argument decisively prevails.

During Asian trading on December 31, the US Dollar Index reflected this trapped positioning, fluctuating tightly around 98.20. At 9:36 GMT+8, it sat at 98.22—a textbook expression of the “capped-bottom, floored-top” dynamic that dominates near-term expectations. Until the Fed consensus clarifies, dollar traders should expect continued volatility within defined bands rather than directional breakouts.