RATE CUT
Let’s start with the basics. The US Federal Reserve proceeded with a third consecutive rate cut of 25 basis points, bringing the federal funds rate to a range of 3.50% to 3.75%. This is the lowest level in the past three years. And yes, the move did not surprise the markets, but it remains extremely important because it confirms the shift in monetary policy.
Why was this decision made? The truth is that the Fed is facing a difficult equation. On one side, inflation remains stubbornly above the 2% target. On the other, the labor market is showing signs of slowing, with layoffs exceeding 1.1 million up to November. Hiring also remains stagnant. This shift of risk toward unemployment, as Powell himself said, is what ultimately pushed the Fed to cut rates. Powell even called it “a safety decision” for the labor market.
What is particularly interesting is that the decision was not unanimous. We had three dissents: two members preferred no change at all, while Stephen Miran argued for a larger cut of 50 basis points. The Committee’s opinions were sharply divided, something clearly reflected in the updated dot plot, which showed an even wider dispersion of forecasts than before.
The projections for the policy rate at the end of 2026 point to only one cut. The interesting part is that the members’ estimates were scattered, with some seeing rates near 2% and others placing them as high as 4%. This divergence reflects the uncertainty surrounding the path of the economy, as well as the differing views within the Committee. Even for 2027 and 2028, the dot plot displays significant variation.
So what does this mean going forward? The Fed itself tells us it is now in wait and see mode. In other words, it will assess incoming economic data before making further moves. Policy is already approaching the so called neutral rate, which means the Fed does not want to lean too heavily in either direction. The bar for additional cuts is now higher. Still, markets are pricing in at least two more cuts in 2026, with a 68% probability according to CME FedWatch. This means investors expect further easing regardless of the Fed’s caution.
WHAT WE LEARNED FROM POWELL
But the most meaningful part of the day came, as always, from Jerome Powell himself.
Powell emphasized several key points and, in simple words, told us that:
• The decision to cut was not easy. “It was a close call.”
• He sees risks both for unemployment and for inflation and therefore balance is needed.
• Tariffs have contributed to inflation, but he does not expect lasting impact.
• Productivity is rising, but it is too early to say whether this is due to artificial intelligence.
• The housing market is facing real issues and a 25 basis point cut is not enough to fix them.
• Monetary policy is now moving close to neutral and for that reason the Fed can afford to wait.
• The 2% inflation target remains firm and non negotiable.
He was clear: conditions are complex and risks exist on both sides. But the main takeaway is that the Fed has no appetite for hikes and its overall stance remains supportive, both through rates and liquidity.
INVESTMENT VIEW
The news is positive. The Fed remains supportive toward the economy and markets. No rate hikes are expected on the horizon. On the contrary, additional cuts in 2026 are possible. This creates a favorable environment for risk assets, especially in a context where companies will be able to borrow more cheaply and invest in growth.
However, as I am always saying, I do not invest based on forecasts but on my strategy. Markets are unpredictable, but consistency pays.
Posted Using INLEO