On December 10th, during the 2-day FOMC meeting Fed successfully delivered its third consecutive rate cut, slicing 25bps to bring the range to 3.50%–3.75%. The markets reacted positively to this news as the Dow surged nearly 500 points, the S&P 500 gained 1.5%, and the tech sector rallied 2.1%. But if you look deep into his notes, it is apparent that Jerome Powell just rewrote the 2026 playbook.
A dovish delivery, but with a hawkish message.
What Actually Happened: The Details That Matter
The Rate Decision:
Third consecutive cut, totaling 175 basis points of easing since September 2024
9-3 vote (three dissenters wanted to hold steady—internal division matters)
Federal funds rate now at 3.50%–3.75%, approaching "neutral" territory
The Forward Guidance Shift:
Powell quoted that "The adjustments since September bring our policy within a broad range of estimates of neutral. And, as we noted in our statement today, we are well-positioned to determine the extent and timing of additional adjustments based on the incoming data and the evolving outlook, and the balance of risks."
The FOMC stated that “the downside risks to employment rose in recent months, while inflation remains somewhat elevated.”
Translation: The Fed is worried about both sides of its mandate and aims to strike a precarious balance that limits room for aggressive easing in the future.
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Powell's Press Conference: Reading Between the Lines
Chair Powell’s speech focused on signaling patience while keeping his options open. Here are some key takeaways from his speech:
About the Economy: Regarding future rate cuts, Powell stated that "We're well positioned to wait and see how the economy evolves from here". When pressed about whether cuts are tougher to justify now, Powell acknowledged: "Having cut 75 and, you know, the effects of the 75 basis points will only begin to be coming in...we're well positioned to wait to see how the economy evolves."
The current US GDP growth is moderate at 1.7% for 2025. However, the concern should be about the K-shaped recovery on households spending as the high-income households drive the spending, while lower-income households continue to strain under elevated prices.
On Inflation: When asked about the inflation, Powell stated that “everyone around the table at the FOMC agrees that inflation is too high and we want it to come down, and agrees that the labor market has softened and that there is further risk.”
Powell was direct about the impact of inflation as he mentioned that: "It's really tariffs that's causing most of the inflation overshoot." He characterized tariff effects as "a one-time shift in the price level" that should peak in Q1 2026, estimating the impact at "a couple of tenths or even less than that."
On Jobs: Powell showed his concern over unemployment numbers, which were currently at 4.4%, with hiring easing and monthly job growth potentially negative after survey adjustments. Immigration slowdowns and participation dips exacerbate supply constraints. AI's labor impacts are "not yet evident," but downside employment risks are rising.
On AI's labor impact, Powell said: "It's probably part of the story. It's not a big part of the story yet," noting that while companies announce layoffs citing AI, "people are not filing for unemployment insurance" in meaningful numbers yet.
The Money Quote: "Additional rate cuts will be tougher to justify" without clearer signs of weakness. But Powell quipped: "I don't think that a rate hike is anybody's base case at this point"—easing fears of reversal while anchoring expectations for a pause.
The Dot Plot: One Cut, Maybe Two
The updated Economic Projections will tell the real story with the median dot plot remaining unchanged from September, implying roughly one 25-basis-point cut in 2026, followed by another in 2027—a total of ~50 basis points over two years.
Here's what shifted:
Variable | 2025 | 2026 | 2027 | Change from Sept |
Real GDP Growth | 1.7% | 2.3% | 2.0% | ↑ +0.5% for 2026 |
Unemployment Rate | 4.5% | 4.4% | 4.2% | Unchanged |
PCE Inflation | 2.9% | 2.4% | 2.1% | ↓ -0.2% for 2026 |
Core PCE Inflation | 3.0% | 2.5% | 2.1% | ↓ -0.1% for 2026 |
Fed Funds Rate | 3.6% | 3.4% | 3.1% | Unchanged |
The takeaway: Growth is stronger than expected (AI and fiscal boosts cited), but inflation remains sticky. The Fed's projecting a dovish plateau—far more restrained than market hopes for 75–100 basis points of cuts next year.
Market Reactions: Rally with Restraint
The immediate response validated our December FOMC Reaction Matrix prediction of a "neutral-to-hawkish" landing:
Equities: Risk-on snapback, but muted by guidance
S&P 500: +1.5%
Nasdaq: +2.1% (tech-led)
Small caps: +1.8%
Growth sectors outperformed defensive sectors
Fixed Income: Dovish yield compression
2-year Treasury: -5 bps to 3.85%
10-year: -5 bps to 4.10%
Curve steepened mildly post-Powell
Credit spreads narrowed 3-5 bps
Currency & Commodities:
USD weakened 0.4% against the Euro
Oil prices grew by 1.2% on growth optimism
Gold remained flat
VIX dropped to 15, but option flows suggest persistent hedging in the coming days
The rally was milder than many experts predicted, indicating that the markets digested the cut without overreacting to the cautious forward guidance.
The Three Risks Powell Didn't Say Out Loud
Macro forces to watchout for in 2026
What This Means for Your Portfolio
The December FOMC confirms a "higher-for-longer" environment with easing limited to 25–50 basis points in 2026 unless downside risks materialize. Here are some strategies that may be beneficial to your portfolio.
Fixed Income:
Favor a 5–7-year range for higher yield capture
Target investment-grade credit as spreads remain tight
TIPS can be effective in the short-term
Short-duration floating-rate notes offer ballast if the Fed pauses
Equities:
Prefer quality growth over cyclicals
Dividend aristocrats may provide income stability
Small caps may face headwinds if rate cuts stall
Critical Dates to Watch
January 10: Jobs report (Watch for unemployment above 4.5%)
January 15: CPI (Inflation above 3% complicates the future cuts)
January 28-29: Next FOMC meeting (Compare it with the December stance)
According to CME Fed Watch, there is a 77% chance that rates are expected to remain at the current level in January 2026, but a 0% chance for them to remain at the current level by June.
CME FedWatch Tool - Aggregated Meeting Probabilities
Meeting Date | 300–325 | 325–350 | 350–375 |
1/28/2026 | 0.00% | 22.14% | 77.86% |
3/18/2026 | 0.00% | 55.45% | 44.55% |
4/29/2026 | 0.00% | 76.14% | 23.86% |
6/17/2026 | 28.49% | 71.51% | 0.00% |
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The Bottom Line
As mentioned above, the FOMC meeting implies a hawkish picture, while the results remain dovish. Everything signals that 2026 will be a year of "wait-and-see", a policy where results determine the path forward.
In the case of investors, the “soft-landing narrative” remains intact, but the fragilities can still be seen. So, don't count on aggressive easing and position your portfolio to assure resilience. Focus on quality assets, duration exposure for yield, and hedges against either inflation surprises or labor weakness.
The Powell Paradox is this: he's easing into caution. And in markets, caution often matters more than cuts.
Important disclosures: This newsletter is provided for informational purposes only and does not constitute investment advice. All investments involve risk, including possible loss of principal. Please consult with your financial advisor before making investment decisions.
