Fed Delivers Third Straight Rate Cut as Policy Consensus Frays and Markets Reassess the 2026 Path

The Federal Reserve lowered interest rates by 25 basis points, bringing the federal funds target range to 3.50%–3.75% in its December meeting. It marks a third consecutive cut and extends one of the most rapid pivots in modern Fed history. While easing aims to cushion a cooling labor market, the decision revealed an increasingly divided committee. For markets, the underlying message is mixed: policy is loosening, but conviction inside the Fed is weakening, and the end of the cycle is now in sight for risk assets such as the S&P 500 Index (Zorrox: SPX500.).

A Split Committee Signals Shrinking Appetite for Further Cuts

The vote tally underscored the shift. Three policymakers dissented — two against cutting and one favoring a larger move — reflecting a committee struggling to reconcile slowing employment with inflation that remains above target. The statement acknowledged softer labor conditions but avoided any suggestion that the Fed is close to declaring victory on price stability. Instead, policymakers signaled that future adjustments will require clearer evidence that disinflation is progressing and that the labor market is weakening in a more material way.

This kind of division is rare for the Fed during active easing cycles. It suggests the bar for additional rate cuts is rising, even as policy becomes less restrictive. Traders expecting a smooth, multi-quarter glide path lower will have to navigate a far more conditional environment.

Labor Market Concerns Are Driving the Shift

The Fed’s rapid pivot toward easing has been driven primarily by the labor side of the mandate. Job creation has slowed, hiring intentions have softened, and survey data points to weaker demand for labor, even if unemployment remains historically low. The Fed is effectively acting pre-emptively, cutting rates before the labor market deteriorates sharply.

But calling this an easing “cycle” may be an overstatement. This is risk management — not a repeat of 2019 or 2008. The Fed is willing to support employment, but it is not prepared to abandon caution on inflation. That duality creates an environment where cuts can continue, pause abruptly, or even reverse if economic data strengthens unexpectedly.

Inflation Remains Above Target, and Policy Is Only Modestly Looser

Despite three consecutive cuts, policy remains in a restrictive zone, at least relative to the Fed’s view of a roughly 3% neutral rate. While inflation has cooled from its peaks, core readings remain above the 2% objective, and projections suggest a slow return to target. The Fed emphasized this point: it is easing, but it is not relaxing.

The updated rate projections highlight the committee’s hesitation. Policymakers collectively see limited room for further cuts in 2026, and the dispersion of individual projections is unusually wide. That uncertainty filters directly into asset pricing because it implies that every incoming inflation or labor print has the potential to shift expectations meaningfully.

Market Reaction: Relief, but Not Euphoria

Rates markets reacted with a modest bull steepening — short-dated yields fell on the cut, while long-dated yields remained anchored by persistent inflation risk and fiscal concerns. The curve’s message is straightforward: policy is loosening, but growth is hardly guaranteed to reaccelerate.

Equities delivered a muted response. Lower policy rates provide valuation support for interest-rate-sensitive sectors, but the lack of a unified Fed narrative tempers enthusiasm. A central bank cutting into a slowing labor market, with disagreement growing inside the committee, is not the conditions-underwriting environment equity bulls prefer. Risk appetite is supported, not unleashed.

In FX, any downward pressure on the dollar will depend on how many cuts the market believes are still on the table, rather than on the decision itself. With inflation still above target and the Fed signaling limited scope for additional easing, sustained weakness is far from assured.

The Path Forward: One More Cut, Then Caution

The Fed now appears closer to the end of its adjustment phase than the beginning. With dissent rising and inflation progress slowing, policymakers will want clearer evidence before cutting again. Economic signals will now dictate the rhythm: strong labor data could reset expectations toward a pause, while weakness — particularly in hiring or incomes — could reopen space for another move.

For traders, the landscape is defined by conditionality rather than momentum. The direction of travel is lower rates, but the timing and the total amount of easing remain uncertain. The era of predictable, sequential cuts is already over.

Tips for Traders

• Track the S&P 500 Index (Zorrox: SPX500.) for how equities balance lower discount rates against rising late-cycle risk; the narrative will shift quickly on data.

• Watch front-end Treasury yields — they will provide the cleanest read on whether markets believe the Fed has one more cut in reserve or is preparing to pause.

• Treat each labor and core inflation release as a potential repricing event; with the Fed divided, the market’s sensitivity to data is elevated.

• Avoid assuming a broad dollar downtrend; limited remaining cuts and persistent inflation risk keep FX outcomes balanced rather than directional.

• Position for volatility rather than a one-way easing cycle — the Fed’s next moves are data-dependent, not pre-committed.