Fed Cuts Rates But Signals a Halt, Jolting Markets
A divided FOMC projects only one more cut in 2026, tempering investor hopes for a sustained easing cycle and sending mixed signals on future policy.
The Federal Reserve cut its benchmark interest rate on Wednesday but signaled it may be done for now, a move that surprised markets hoping for a clear path to lower borrowing costs. The central bank’s decision was marked by significant internal division, tempering the initial dovish read and sending a wave of volatility across equity and bond markets.
While the quarter-point reduction in the federal funds rate was widely anticipated, the central bank’s updated economic projections provided a hawkish twist. Policymakers now anticipate only one additional rate cut through the end of 2026, a sharp downward revision from previous forecasts. This suggests a much shallower and more prolonged easing cycle than many investors had priced in.
The S&P 500, which had been trading higher ahead of the announcement, erased its gains to close little changed. Meanwhile, the 10-year Treasury yield, which typically falls on expectations of lower rates, ticked higher as bond investors reassessed the future path of policy. The US dollar also strengthened, reflecting the appeal of higher relative rates for longer.
The decision was not unanimous, with three Federal Open Market Committee members dissenting in favor of holding rates steady. This level of public disagreement is uncommon and highlights a growing schism within the Fed over how to proceed. Some officials appear concerned about cutting rates while inflation remains above the 2% target, even as economic growth shows signs of moderating.
In his post-meeting press conference, Fed Chair Jerome Powell stressed a data-dependent approach, noting that the committee is prepared to be patient. "We are confident that policy is restrictive and is weighing on the economy as intended," Powell stated. "But we need to see more convincing evidence that inflation is moving sustainably down to our target before we consider further cuts."
This sentiment was underscored in the committee's official statement, which adjusted its language to indicate a more cautious stance. The new guidance provides markets with a clearer, albeit more conservative, outlook. According to a report from The Wall Street Journal, the signal that the Fed may be done for now introduces fresh uncertainty for businesses and investors who had been positioning for a steady decline in rates.
Analysts are now recalibrating their expectations for 2026. The projection of a single cut next year, as highlighted by Bloomberg, suggests the central bank sees a resilient economy that does not require significant monetary stimulus. This hawkish cut leaves investors in a holding pattern, with future policy moves now hinging more critically than ever on incoming inflation and employment data.