The Fed's decision turns out to be less hawkish than predicted: what the committee actually announced

The Fed announced its Thursday decision to cut interest rates by 25 basis points, but its message goes far beyond the mere change in rates. Contrary to initial market expectations, which suggested a more hawkish stance, the reality brought much more dovish signals. This is the first change in Fed tone since early 2020 – explicitly including a $40 billion Treasury bond purchase program in the policy statement sends a clear message of easing.

Contrary to expectations: less opposition than anticipated

The market initially prepared for a higher number of dissenting votes against the cut and higher dots in the dot plot – a chart showing FOMC members’ forecasts. However, the reality turned out to be different. Of the six committee members who proposed keeping rates unchanged next year, only two had voting rights. This result is well below the hawkish assumptions the market had built before the meeting.

Wall Street analysts point out a characteristic divergence: although the decision contains some hawkish elements, its overall tone remains decidedly dovish for borrowers. David Mericle from Goldman Sachs notes that six members actually expressed reservations in the dot plot – more than expected – but simultaneously, resuming operations in the (asset markets, whether through currency swaps or other instruments), directly included in the statement, is an exceptionally rare move in Fed practice.

Growth forecasts alter the dovish picture

Bloomberg Economics indicates that the committee significantly raised its economic growth forecasts, while lowering inflation projections. Although the dot plot did not change drastically, Bloomberg’s chief economist Anna Wong interprets the situation as a call for deep cuts next year – possibly up to 100 basis points, instead of the 25 suggested by the median dot plot.

According to Wong, the weakness of projected wage growth and the lack of clear signs of inflation rebound in the first half of 2026 explain the Fed’s internal readiness for more advanced easing conditions.

Labor market: close to neutral, but with many questions

The unemployment rate forecast for Q4 remains at 4.5%, while the current unemployment rate is 4.44%. Mike Cahill from Goldman Sachs notes that to reach the committee’s median forecast, growth would have to be minimal – below 5 basis points per month. Meanwhile, seven FOMC members forecast an increase to the 4.6%-4.7% range, which better reflects recent trends.

This divergence in forecasts leads analysts to conclude that the Fed is struggling with interpreting labor market data – whether we are experiencing a slowdown or a normalization after previous growth.

Fed’s balance sheet structure sparks debate

The Treasury bond purchase program has generated significant interest among strategists. Ira Jersey from Bloomberg emphasizes a fundamental issue: whether the reserve balance is sufficient or not. According to Jersey, if the Fed wants to maintain a stable reserve level, it should resort to temporary open market operations during shortages, rather than permanent operations. Traditional repo operations might be a more precise tool for calibrating relative to the full purchase program.

Political uncertainty as a volatility factor in 2026

The leadership change at the Fed next year introduces an additional element of uncertainty. Jim Bianco from Bianco Research warns that the new chair could be perceived as a figure with a political agenda. Given the lack of more pronounced dissent in the current FOMC composition, there is a risk that more overt opposition may only appear after the new leader takes office – which could itself look political.

Seema Shah from Principal Asset Management states that a lack of unanimity at the meeting would be natural given the discrepancies in estimates of the neutral interest rate and insufficient flow of recent economic data. Her forecast indicates that the Fed will gradually assess the delayed effects of earlier tightening – additional easing in 2026 will be cautious and dependent on solid evidence of economic health.

Summary: cautious balance rather than radical change

Richard Flynn from Charles Schwab UK sees the steps taken not as a revolutionary turn, but as a cautious correction responding to increasing downside risks in the global environment. For investors, this means gentle support for risky assets – potentially a seasonal “holiday rally” – but volatility may remain high as the market assimilates the outlook for future Fed moves and broader US economic prospects.

The Fed’s Thursday decision thus shows a committee acting based on uncertainty – cutting rates again, but with less conviction than initial forecasts suggested. It’s a balance between concerns about employment and a desire not to stimulate inflation – a delicate dance that will define monetary policy over the next year.