BRIDS Macro: The Dec FOMC – A Hawkish or Dovish Cut? Our View
The FOMC cut the Fed Funds Rate by 25 bps to 3.50%–3.75% in December which broadly in line with market expectations, citing moderate economic growth, softer job gains, and inflation that has moved up from earlier in the year.
- The Fed’s divisions were evident in the rate-cut decision, which passed by a 9–3 vote. Governor Miran pushed for a larger 50-bps cut, while Goolsbee and Schmid preferred no change, resulting in an unusual three-way split. In our view, market reaction was also split: some viewed the move as a hawkish cut given the more gradual rate path signaled for 2026, while others argued it was a dovish one as the rate cut paired with faster balance-sheet expansion reflects the Fed’s pro-cyclical bias.
- We note 4 key points from the FOMC:
- The Fed’s division has widened, with dissents from both the dovish and hawkish ends of the spectrum. This broadening disagreement increases the likelihood of a more cautious pace of easing ahead, as the Committee faces rising uncertainty around the economic outlook and a less unified policy view.
- The FOMC emphasized a shift in the balance of risks: downside risks to employment have risen even as inflation remains “somewhat elevated”. This indicates the Fed is moving toward a more balanced or neutral stance, signaling that future decisions will be heavily data-dependent, with no preset course for additional cuts. In our view, this signals a more measured pace of future rate cuts.
- The Fed announced it will initiate purchases of Treasury bills in Dec (USD40bn) and, if needed, other short-term Treasuries to maintain ample reserves. This marks a notable operational shift, as the Committee judges that reserve balances have declined to the lower end of “ample,” prompting a move toward modest balance-sheet expansion to stabilize liquidity.
- The latest SEP show an upgraded growth outlook, a clear shift away from the stagflation concerns seen earlier in the year. The unemployment forecast remains largely unchanged, while PCE inflation is projected to ease further in 2026. The Dot Plot remains unchanged from Sep’s forecast, with the FFR still expected at 3.4 percent by end-2026 and 3.1 percent by end-2027.
- Market impact: Following the meeting, The 10-year Treasury yield slipped to 4.15% after the 25bps cut, with the Fed’s cautious language boosting the probability of a January hold to 77.9% from 69.8%. The S&P 500 rose +46.3 points as risk sentiment improved despite mixed sector performance. Meanwhile, the DXY fell to 98.68 (-0.17% w-w), recording a six-week low.
- Our view for 2026: As highlighted in our Monday report, lingering inflation pressures and a more cautious policy setting would limit the pace of easing. The easing cycle is set to continue, though at a slower pace than in 2025. A more dovish Fed Voting Committee composition and political cycle may also lean toward further easing, though policymakers will stay wary of undoing recent disinflation progress.
- In our view, with policy signals converging and volatility easing, we expect Indonesia’s market enters 2026 with a firmer footing, underpinned by steady macro conditions and coordinated policy support. Please refer to this link for our view on The Fed in 2026: What to Expect? The four key factors to watch. (BRIDS Strategy: 2026 Series – Navigating the Rate and Yield Transition https://link.brights.id/brids/storage/42830/20251208-Macro-Strategy.pdf
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