A rate decision passed by a 9-3 vote paints a picture of intense tug-of-war within the Federal Reserve between stubborn inflation and employment risks, with the policy balance once again tilting toward precautionary rate cuts amid subtle data changes.
The Federal Reserve decided, with 9 votes in favor and 3 against, to lower the federal funds rate target range by 25 basis points to 3.50%-3.75%. This marks the third consecutive rate cut since September this year.
Alongside the rate decision, an important balance sheet operation was also announced: the Federal Reserve stated it would purchase $40 billion in Treasury bills over 30 days starting December 12 to maintain ample reserve supply.
I. Core of the Decision: Precautionary Rate Cuts and Subtle Wording Adjustments
● The Federal Reserve made subtle but key changes to its description of the current economic situation in its policy statement. The statement noted that "economic activity is expanding at a moderate pace," while also acknowledging that "employment growth has slowed since the beginning of the year, and the unemployment rate has risen as of September."
Compared to previous statements, this time the description of the unemployment rate as "low" was removed, reflecting actual changes in the labor market.
● On inflation, the Federal Reserve admitted that "inflation has risen somewhat since the beginning of the year and remains elevated." This maintains previous vigilance regarding inflationary pressures and echoes the 2.8% core inflation rate data from September.
● Regarding the future policy path, the statement added new guidance, saying that when assessing the "extent and timing" of further adjustments, the latest data, changes in the economic outlook, and the balance of risks will be carefully evaluated. This change in wording suggests increased flexibility in the Federal Reserve's subsequent policies.
II. Internal Struggle: Policy Divergence Behind the 9-3 Vote
● The voting result of this meeting showed clear differences of opinion. Nine members supported a 25 basis point rate cut, while three members voted against it.
● Among the dissenters, Governor Steven Mirren advocated for a larger rate cut, preferring a one-time reduction of 50 basis points. Chicago Fed President Austan Goolsbee and Kansas City Fed President Jeffrey Schmid opposed any rate cut, preferring to keep rates unchanged.
● This is the first time since 2019 that three officials have cast dissenting votes at the same policy meeting. This divergence highlights different risk assessments within the Federal Reserve: one side is more concerned about a weakening labor market, while the other is more focused on persistent inflationary pressures.
III. Dot Plot Analysis: Rate Path Forecast for 2026-2027
According to the latest dot plot, Federal Reserve officials' expectations for the rate path in 2026 have become significantly divided.
● The dot plot shows that among the 19 FOMC members, 4 believe rates should remain in the 3.50%-3.75% range, 4 support a 25 basis point cut, and 4 support a 50 basis point cut. Another 3 believe rates should fall below 3%, and 3 even think rates should be raised by 25 basis points.
● Despite the differences, the median forecast shows that officials expect a 25 basis point rate cut in both 2026 and 2027. This means that, from current levels, rates could fall to the 3.00%-3.25% range by the end of 2027.
IV. Technical Balance Sheet Expansion: The Substance of the $40 Billion Bond Purchase Plan
● In addition to the rate cut decision, the Federal Reserve also announced an important balance sheet operation. The committee judged that "reserve balances have declined to an adequate level" and decided to initiate purchases of short-term U.S. Treasuries.
● The initial monthly purchase size is set at $40 billion, and may remain at a high level in the coming months to ease money market pressures. Powell emphasized at the press conference that such operations are "purely to maintain ample reserve supply" and are unrelated to the monetary policy stance.
● This operation marks an important adjustment in the Federal Reserve's monetary policy implementation framework. Just two weeks ago, the Federal Reserve ended its three-year quantitative tightening (QT) policy, which had reduced the balance sheet by allowing bonds to mature without reinvestment.
V. Economic Outlook: Upgraded Growth Expectations and Lowered Inflation Forecasts
● On the economic forecast front, Federal Reserve officials are more optimistic about growth in 2026 and have slightly lowered their inflation forecasts.
● According to the latest forecasts, officials raised the median GDP growth expectation for 2026 from 1.8% in September to 2.3%, reflecting increased confidence in economic resilience.
● On inflation expectations, the median forecast for the personal consumption expenditures (PCE) inflation rate at the end of 2026 was lowered from 2.6% in September to 2.4%, but this is still above the long-term target of 2%. This adjustment reflects the Federal Reserve's expectation for inflation to gradually decline, but acknowledges that the process may be slow.
VI. Policy Background: Complex Data Environment and External Pressures
● This policy decision was made amid a complex economic data environment and external pressures. The unemployment rate has risen from 4.1% in June to 4.4% in September, while the inflation rate remains high at 2.8%.
● Government shutdowns have further complicated the policy outlook, causing the release of some key economic data to be delayed. This data incompleteness has increased the difficulty of the Federal Reserve's decision-making.
● External political pressure is also mounting. President Trump has stated that he has decided who will succeed Powell as Federal Reserve Chair when his term ends in May 2026, and hinted that the candidate will be officially announced early next year. The White House has repeatedly criticized the Federal Reserve for not cutting rates quickly enough, raising concerns about whether the central bank's independence is under threat.
VII. Market Impact: From Expectation Management to Actual Operations
● The Federal Reserve's current policy mix—precautionary rate cuts and technical balance sheet expansion—will have multiple impacts on the market. The rate cut itself was widely anticipated by the market, but the degree of internal disagreement exceeded some investors' expectations.
● On the balance sheet operation, the Federal Reserve plans to maintain a relatively high purchase volume in the initial phase, then adjust according to seasonal demand changes. Powell estimated that after the April 2026 tax peak, the monthly bond purchase amount may drop to between $20 billion and $25 billion (UTC+8).
● This arrangement reflects lessons learned by the Federal Reserve from the repo market turmoil in 2019. At that time, prolonged quantitative tightening led to sharp volatility in short-term interest rate markets, forcing the Federal Reserve to intervene urgently.
After the decision was announced, the three major U.S. stock indexes fluctuated sharply during trading. The market is digesting the dual signals of uncertainty in the rate path and balance sheet expansion.
The deep divisions revealed by the dot plot suggest that every step the Federal Reserve takes in the future may be accompanied by intense internal debate. As the April 2026 tax season approaches, monthly bond purchases may fall from $40 billion to $20-25 billion (UTC+8), but this "technical balance sheet expansion" has already injected liquidity into the market in substance.
New York Fed President Williams once admitted that judging whether the market has "ample reserves" is "an inexact science." At this crossroads, every step the Federal Reserve takes is like cautiously navigating uncharted waters.
