A rate decision passed by a vote of 9 to 3 depicts the intense tug-of-war within the Federal Reserve between persistent inflation and employment risks, with the policy balance once again tilting towards preventive rate cuts amid subtle data changes.

The Federal Reserve decided to lower the target range for the federal funds rate by 25 basis points to 3.50%-3.75% with a result of 9 votes in favor and 3 against. This is the third consecutive rate cut since September of this year.

Along with the interest rate decision, an important balance sheet operation was announced: the Federal Reserve stated it will purchase $40 billion in Treasury securities over a 30-day period starting December 12 to maintain adequate reserve supply.

1. Core Resolution: Preventive Rate Cuts and Subtle Adjustments in Language

● The description of the current economic situation in the Federal Reserve's policy statement has undergone subtle but crucial changes. The statement notes that "economic activity is expanding at a moderate pace" while 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 a "lower" unemployment rate has been removed, reflecting the actual changes in the labor market.

● Regarding inflation, the Federal Reserve admits that "inflation has risen since the beginning of the year and remains at a high level." This statement maintains previous vigilance regarding inflation pressures and corresponds with the core inflation rate of 2.8% in September.

● Regarding the future policy path, the statement added new guidance, indicating that when assessing the "magnitude and timing" of further adjustments, the latest data, changes in economic outlook, and risk balance will be carefully evaluated. This change in wording suggests that the Federal Reserve has increased its flexibility regarding subsequent policies.

2. Internal Game: Policy Divergence Behind the 9-3 Vote

● The voting results of this meeting show a clear divergence of opinions. Nine members supported a rate cut of 25 basis points, while three members voted against it.

● Among the opposition, Governor Stephen Miller advocated for a larger rate cut, favoring a one-time reduction of 50 basis points. Chicago Fed President Austin Goolsbee and Kansas City Fed President Jeffrey Schmid opposed any rate cuts, hoping to maintain the current interest rate.

● This is the first time since 2019 that three officials voted against the decision at the same monetary policy meeting. This divergence highlights differing judgments within the Federal Reserve regarding economic risk assessment: one side is more concerned about a weakening labor market, while the other is more focused on persistent inflationary pressures.

3. Dot Plot Analysis: Interest Rate Path Forecast for 2026-2027

According to the latest dot plot released, Federal Reserve officials have significantly diverged in their expectations for the interest rate path in 2026.

● The dot plot shows that among the 19 FOMC members, 4 believe that interest rates should remain unchanged in the 3.50%-3.75% range, 4 support a 25 basis point cut, and 4 support a 50 basis point cut. There are also 3 who believe interest rates should drop below 3%, and another 3 who even think rates should be raised by 25 basis points.

● Despite the differences, the median forecast indicates that officials expect a 25 basis point rate cut in both 2026 and 2027. This means that by the end of 2027, interest rates could potentially drop to the range of 3.00%-3.25% based on current levels.

4. 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 determined that "the reserves have fallen to a sufficient level" and decided to initiate the purchase of short-term U.S. Treasury bills.

● The purchase scale for the first month is set at $40 billion, and it may remain at a high level in the coming months to alleviate pressure in the money market. Powell emphasized at the press conference that such operations are "purely to maintain sufficient reserves" and are unrelated to the stance of monetary policy.

● This operation marks an important adjustment to the implementation framework of the Federal Reserve's monetary policy. Just two weeks ago, the Federal Reserve ended a three-year period of quantitative tightening (QT) by allowing bonds to mature without reinvestment to reduce the balance sheet.

5. Economic Outlook: Upward Revision of Growth Expectations and Downward Revision of Inflation Forecasts

● In terms of economic forecasts, Federal Reserve officials are more optimistic about the growth expectations for 2026 and have slightly revised down their inflation forecasts.

● According to the latest forecasts, officials have raised the median GDP growth rate expectation for 2026 from 1.8% in September to 2.3%, showing increased confidence in economic resilience.

● Regarding inflation expectations, the median forecast for the personal consumption expenditures (PCE) inflation rate at the end of 2026 has been revised down from the September forecast of 2.6% to 2.4%, but still above the long-term target of 2%. This adjustment reflects the Federal Reserve's expectation of a gradual decline in inflation but acknowledges that the process may be slow.

6. Policy Background: Complex Data Environment and External Pressures

● This policy decision comes amidst 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%.

● The government shutdown further complicated the policy outlook, causing the release of some key economic data to be postponed. This incompleteness of data has increased the difficulty of the Federal Reserve's decision-making.

● External political pressure is also increasing. President Trump has stated that he has made a decision on who will succeed Powell as Federal Reserve Chairman when his term ends in May 2026 and hinted that he will announce the candidate early next year. The White House has previously criticized the Federal Reserve for not cutting rates quickly enough, raising concerns about whether the central bank's independence is under threat.

7. Market Impact: From Expectation Management to Actual Operations

● The Federal Reserve's current policy combination—preventive rate cuts and technical balance sheet expansion—will have multiple effects on the market. The rate cut decision itself has been widely anticipated by the market, but the level of internal disagreement exceeded some investors' expectations.

● In terms of balance sheet operations, the Federal Reserve plans to initially maintain a high purchase scale and then adjust according to seasonal demand changes. Powell estimates that after the peak tax reporting period in April 2026, the monthly bond purchase amount may drop to between $20 billion and $25 billion.

● This arrangement reflects the lessons learned by the Federal Reserve from the turmoil in the repurchase market in 2019. At that time, prolonged quantitative tightening led to severe fluctuations in the short-term interest rate market, forcing the Federal Reserve to intervene urgently.

After the announcement of the resolution, the three major U.S. stock indexes experienced significant fluctuations during the session. The market is digesting the uncertainty in the interest rate path and the dual signals of balance sheet expansion.

The deep divergences revealed by the dot plot suggest that every action the Federal Reserve takes in the future may be accompanied by intense internal debate. As the April 2026 tax season approaches, the monthly bond purchase scale may decrease from $40 billion to $20-25 billion, but this "technical balance sheet expansion" has effectively injected liquidity into the market.

New York Fed President Williams has admitted that judging whether the market has "sufficient reserves" is "an imprecise science." At this crossroads, every step the Federal Reserve takes feels like navigating cautiously through uncharted waters.

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