Fed Cuts Rates as Expected, Launches RMP; Growth Stocks Cool Off but 'Earnings Trades' Gain Momentum

On Wednesday, December 10 (ET), the Federal Reserve announced a 25bp reduction in the federal funds target range to 3.50%–3.75%. This marks the third rate cut in 2025, bringing the cumulative reduction this year to 75bp. Beneath the surface of this seemingly routine cut, the meeting revealed two key signals: an unusual level of internal division within the Committee and a future policy path that will be highly dependent on data and timing.

I. Key Takeaways: The Cut Was Expected, but Divisions Stand Out

Compared with the previous meeting at the end of October, the most significant difference in this meeting’s statement is that among the 12 FOMC voting members, three voted against the 25bp rate cut—one more dissent than in October. This is the first time since 2019 that a Fed rate decision has faced three dissents.

Kansas City Fed President Jeffrey Schmid and Chicago Fed President Austan Goolsbee favored keeping rates unchanged, while Fed Governor Stephen Miran supported a one-time 50bp cut. Such a split is extremely rare in recent years and indicates that divisions within the decision-making body over the balance between inflation and employment are widening.

The dot plot shows that officials’ median projection for the federal funds rate at the end of 2026 remains at 3.4%, and based on the median, there appears to be room for one additional 25bp cut next year. But the individual projections are dispersed: among 19 officials, some believe rates should not be cut at all, while others support cuts of 25, 50, 75, or even 100bp—reflecting the absence of a unified policy direction.

At the post-meeting press conference, Fed Chair Jerome Powell said: “Today’s decision enjoyed quite broad support… Some believe we should stop here, while others think we should cut once more or even further.” This remark precisely captures the policy tension: rate cuts are underway, but both the number and magnitude remain highly uncertain.

II. Statement Wording and Stagflation Concerns

The statement included subtle but important changes—specifically, it removed the previous description that the unemployment rate “remains low,” replacing it with “the unemployment rate edged up through September,” and added an emphasis on assessing the “extent and timing” of additional adjustments.

Veteran reporter Nick Timiraos noted that the Committee has shown “unusual divisions,” with the core conflict being that inflation remains stubborn while the labor market has begun to cool. This combination of “sticky inflation + slowing employment” has raised concerns among policymakers that if they misjudge the pace, they could repeat the stagflation missteps of the 1970s.

Analysts at Goldman Sachs and other institutions pointed out that while the “hawkish tone” has moderated, any further easing will “depend on whether the labor market weakens further.” In other words, the window for continued rate cuts is not automatically open; its width and timing will be determined by employment data.

III. Forecast Revisions: Growth Revised Up, Inflation Slightly Lower

The updated economic projections show that the Fed lowered its inflation forecasts while raising its growth forecasts:

2025 year-end PCE: lowered from 3.0% to 2.9%
Core PCE: lowered from 3.1% to 3.0%
2026 PCE median: lowered from 2.6% to 2.4%

Correspondingly, GDP growth was revised upward—from 1.8% to 2.3% for 2026. The unemployment rate forecast remained largely unchanged (around 4.4% by end-2026), but Powell warned that recent employment numbers may have been overstated. The Committee estimates that job growth in recent months may have been overstated by roughly 60,000, and expects monthly job gains to decline by about 20,000 going forward.

This combination of “stronger growth + slightly lower inflation” theoretically supports further easing, but policymakers are clearly more focused on the sustainability of inflation’s decline and the true condition of the labor market.

IV. Technical Operations: Launching RMP and Stating It Is “Not QE”

Another major development in this meeting was the Fed’s decision to launch Reserve Management Purchases (RMP). The New York Fed will purchase about USD 40 billion in short-term Treasuries over the next roughly 30 days and may buy Treasuries with maturities up to three years in the secondary market as needed to maintain ample reserves.

Officials stressed that this step is for reserve management to support short-term liquidity and not a new round of quantitative easing (QE). However, the operation will directly affect short-term interest rates and the repo market, making it an important technical signal regarding near-term liquidity and funding spreads.

Powell stated that policy is “moving toward a neutral stance and is currently at the upper end of the neutral range,” adding that “nobody is considering rate hikes as a baseline.” Yet he emphasized that no decision has been made for the January meeting, and the Fed will continue to “wait and see how the economy evolves.”

V. Market Reactions and the 2026 Outlook

1. Rate Futures: Expectations for a Pause Rise Sharply

Immediately after the decision, rate futures markets adjusted expectations:

The probability of no cut in January rose from about 70% to 78%
Pricing for cumulative cuts in the first half of next year moved lower
Expected total cuts for the full year narrowed from 3–4 to 1–2

This means markets are starting to accept the signal from the Fed: the easing cycle has shifted into a slow gear and may even pause at some point.

After this year’s phase of “pre-emptive cuts,” the market must adapt to a new policy rhythm: the Fed will cut rates only to avoid economic deterioration, not to stimulate markets.

2. U.S. Equities: Growth Sentiment Softens, Earnings-Driven Trading Strengthens

Although the decision did not shock markets, the heightened internal division made sentiment-driven money more cautious:

$Technology Select Sector SPDR Fund(XLK)$ and growth stocks—especially high-valuation segments—saw profit-taking
$Financial Select Sector SPDR Fund(XLF)$ , $Industrial Select Sector SPDR Fund(XLI)$ , and $Energy Select Sector SPDR Fund(XLE)$ sectors were more resilient
REITs and high-dividend assets were pressured by uncertainty around future rate cuts

Overall, U.S. equity trading is shifting from: “betting on easing” → “betting on earnings.” This pattern is more aligned with a structural bull market, rather than a broad-based one.

Powell’s term ends in May 2026, and upcoming meetings—as well as potential personnel changes—will test policy continuity. While the dot plot shows relatively stable long-term projections (long-run rate around 3.0% for 2026–2028), the short-term path remains highly uncertain

Conclusion

The core of this FOMC meeting is not the additional 25bp cut, but rather that the pace of rate cuts is slowing, policy is becoming more data-dependent, and short-term liquidity management has shifted to the forefront.

For investors, the era of “easy easing” may have ended. The next phase will rely more on data and technical signals: whoever’s data deviates from expectations first may gain the next policy window.

Questions for you:

How do you interpret the Fed’s decision to slow down the pace of rate cuts—do you see it as a cautious move or a signal of uncertainty?
As growth stock sentiment cools and “profit-taking trades” rise, would you favor high-dividend/cyclical stocks or seize potential rebounds in growth stocks?
What impact do you think the RMP (Reserve Management Purchases) will have on short-term liquidity and market stability?

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Federal Reserve Cuts Interest Rates for Third Consecutive Meeting Amid Internal Divisions

The Federal Reserve cut interest rates for the third consecutive time, lowering the federal-funds rate to between 3.5% and 3.75%, signaling a cautious approach with little appetite for further cuts. The decision reflects internal divisions between inflation-wary hawks and employment-focused doves, with concerns over inflation remaining above target and a cooling labor market. Fed Chair Jerome Powell's term ending soon adds uncertainty to future policy. The Fed emphasized data dependency for future moves, highlighting upcoming employment and inflation reports as critical for decision-making.

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