The Federal Open Market Committee (FOMC) of the Federal Reserve has concluded its last interest rate meeting of the year, announcing as expected a reduction of the federal funds rate target range by 25 basis points to 3.5%-3.75%. At the same time, it maintains the mid-term guidance of three rate cuts in 2026 to 3.4%, marking a deepening of the current monetary easing cycle. However, the signals released by the meeting are not solely one-sided easing; the internal policy differences within the decision-making body, cautious assessments of the economic outlook, and adjustments to balance sheet policies collectively create a complex picture affecting global asset pricing.
Core policy: interest rate cut implemented but tone is hawkish, balance sheet reduction concludes with a focus on liquidity
The interest rate decision that attracted the most attention at this meeting largely met market expectations, as the CME FedWatch tool showed that prior to the meeting, the market pricing probability for a 25 basis point rate cut had reached 90%. This is the Fed's third rate cut in 2025, with a cumulative reduction of 75 basis points, and the policy focus continues to shift from anti-inflation to stabilizing growth. However, in contrast to the easing actions, the meeting statement maintained the 'hawkish rate cut' characteristics: on one hand, it emphasized that inflation is still at a 'relatively high level,' with the core PCE inflation forecast remaining at 2.8%, still away from the 2% target; on the other hand, it removed the previous wording of 'risks are roughly balanced' and instead emphasized 'increased uncertainty in economic outlook,' suggesting that subsequent rate cuts will highly depend on data validation.
The adjustment of balance sheet policies became another highlight. The meeting officially confirmed the termination of the tapering plan starting December 1, reinvesting the principal from maturing mortgage-backed securities (MBS) into short-term government bonds, and plans to start a net purchase program of $20 billion in government bonds per month beginning January 2026. This operation is defined by New York Fed President Williams as a 'technical adjustment to adapt to liability needs,' marking the Fed's balance sheet size officially entering a mild expansion phase after bottoming out at $6.5 trillion, which will provide stable liquidity to the money market and alleviate the funding pressure caused by year-end bank tapering.
Deep contradictions: Record divergences among decision-makers, the neutral rate dispute tears apart the policy path.
The most notable feature of this meeting is the growing divergence within the FOMC, marking the most severe split in decision-making since 1993. The voting results show that while Powell was able to push through the rate cut decision due to his coordination skills, opposition voices came from two extremes: Governor Stephen Milan insisted on an aggressive 50 basis point rate cut, arguing that the current policy rate is far above the real neutral rate of around 0.5%, excessively suppressing economic recovery; while Kansas Federal Reserve President Jeffrey Schmid opposed any rate cuts, worrying that easing would reignite inflationary persistence and exacerbate asset bubbles. More concerning is that the dot plot shows a significant divergence in the predictions of the 19 voting members regarding the terminal rate at the end of 2026, with 9 supporting a cut of ≤1 time, 9 supporting a cut of 2 times, and 1 advocating for a 125 basis point cut, completely lacking a consensus guideline.
The core of the divergence stems from the theoretical dispute over the 'neutral rate': dovish officials believe that structural factors such as population aging and technological progress still support a low neutral rate, necessitating rapid rate cuts to avoid economic recession; hawkish officials point out that the 'unsustainable fiscal deficit' in the U.S. is reversing the demand for safe assets, which may cause the long-term interest rate center to systematically rise, and overly rapid rate cuts will lead to a rebound in inflation. This divergence not only weakens policy transparency but also makes it difficult for the market to form stable expectations, laying the groundwork for subsequent asset volatility.
Market impact: Risk assets benefit in the short term, while medium to long-term relies on fundamental support.
After the meeting resolution was announced, global assets exhibited a 'differentiated reaction': the three major U.S. stock indices rose after fluctuations, with the Nasdaq index increasing by 1.41%, as the decline in discount rates significantly enhanced the valuations of tech stocks; the dollar index slightly fell by 0.04 to 103.41, while gold prices rose slightly, reflecting market expectations for the continuation of the easing cycle. Institutions generally believe that the logic supporting risk assets from rate cuts is clear: on one hand, it lowers corporate financing costs, especially benefiting growth sectors like artificial intelligence that rely on external financing; on the other hand, it drives funds from cash-like assets into stocks, corporate bonds, and other areas, forming a configuration dividend.
However, in the long run, the market's rise is not a foregone conclusion. Wellington Investment warns that the current valuations of risk assets are at high levels, with fixed income spreads continuing to narrow. A Fed rate cut does not mean the market will necessarily rise; the fundamentals will remain the core driving factor. For emerging markets, the capital inflow dividends brought by the easing cycle are promising, but caution is needed regarding the impact of a phase of dollar index strength—if Powell emphasizes 'staying cautious before the January meeting' at the press conference, the USD/JPY may test the high of 158, potentially triggering intervention from the Japanese Ministry of Finance, which could lead to fluctuations in emerging market exchange rates.
2026 Outlook: Policy path unclear, three major variables determine direction.
Looking ahead to 2026, the uncertainty of the Fed's monetary policy will further increase. First, the risk of policy continuity brought about by leadership changes cannot be ignored; Powell's term is about to end, and the policy tendencies of the new chairman may reshape the pace of easing. Secondly, the 'completion effect' of economic data is crucial; multiple economic data delayed by the government shutdown will gradually be released. If inflation falls short of expectations or unemployment rises beyond expectations, it could strengthen both hawkish and dovish positions. Finally, the coordination between fiscal policy and monetary policy becomes key, as the Trump administration's tariff policies and fiscal stimulus plans may alter the economic fundamentals, forcing the Fed to adjust its policy path.
Overall, the FOMC meeting at the end of 2025 confirmed the general direction of monetary easing while exposing the Fed's dilemma in balancing inflation, growth, and financial stability. For investors, the purely linear logic of betting on a rate cut cycle is no longer reliable; close monitoring of the evolution of policy divergences, changes in inflation data, and global liquidity flows is needed to find asset opportunities with clear fundamental support amidst volatility.
