A split cut and a clear shift toward caution

The Federal Reserve (Fed) went ahead with a 25 basis points rate cut, taking the target range to 3.50–3.75%. But the tone around the decision mattered just as much as the move. A 9–3 split vote highlighted how divided the committee is right now: Miran pushing for a bigger 50 basis points cut, and Goolsbee and Schmid wanting no cut at all.

The new language in the statement, especially the “extent and timing” line, signalled that the Fed is stepping back a bit to reassess. Policymakers want a clearer sense of how quickly the labour market is cooling and how much of the inflation pickup is simply tariff-related noise. Growth is still described as moderate, job gains are slowing, and inflation remains “somewhat elevated”. Risks around employment, in particular, have shifted.

The Fed also announced it will restart reserve-management T-bill purchases from 12 December, at roughly $40 billion initially, staying elevated for a few months before tapering down.

The SEP: Still no appetite for an aggressive easing cycle

• The projections barely changed from September:
• One 25 basis points cut pencilled in for 2026, and another for 2027.
• The expected path for the fed funds rate is essentially unchanged.
• Unemployment is still seen around 4.4% in 2026.
• Inflation forecasts edged down a little, while growth for next year was revised up to 2.3%, helped by the expected rebound after the government shutdown.

Powell’s press conference: Trying to balance both sides of the mandate

Powell leaned into the idea that the Fed is juggling two conflicting goals: bringing inflation down while avoiding unnecessary damage to the labour market. Right now, the jobs side seems to be slipping faster than previously thought.

Here’s what stood out:

1. Rate hikes aren’t coming back

Powell couldn’t have been clearer: a hike isn’t anyone’s base case. The debate inside the committee is about whether to hold or cut from here, not whether to reverse course.

2. The decision to cut came from labour-market data

The Fed now thinks payrolls have been overstated by around 60K per month, and underlying job growth may actually be slightly negative. With cooling becoming more evident, Powell said the Fed felt it had to respond.

3. Inflation is increasingly a tariff story

Powell argued that goods inflation is being driven “entirely” by tariffs. Strip those out, and inflation is running in the “low 2s”. In addition, services inflation continues to ease, and the Fed expects tariff-related inflation to peak in Q1, assuming no new tariffs are announced.

4. The economy doesn’t look overheated

While consumers are still spending, Powell pushed back against the idea of a “hot” economy, while long-term yields also don’t show any rising concern about inflation.

5. Policy is now around the top of the neutral range

This was another hint that the Fed doesn’t feel the need to tighten from here.

6. The Committee are split but broadly aligned on direction

Powell said there was “fairly broad support” for the decision to cut, though some officials preferred to hold and a few wanted further cuts. Importantly, nobody was pushing for a hike.

7. Labour-market risks remain on top of the agenda

Powell repeatedly highlighted downside risks to employment. He even noted that if the Fed didn’t have to worry about the labour market, rates would be higher right now.

Bottom Line: A Fed that cut because it had to

This meeting painted a picture of a Fed that acted reluctantly. The softening labour market forced its hand, even though inflation hasn’t fully landed where the Fed wants it. Policymakers remain divided on how fast they should ease from here, but united on one thing: rate hikes aren’t coming back.

Tariffs have become the dominant explanation for sticky inflation, giving the Fed more confidence that it can pause and wait for clearer signals. With policy now sitting near the top of the neutral range, the Fed is in “wait and see” mode: cautious, data-dependent, and very aware of the risks building in the job market.