Fed Minutes Signal Slower Rate Cut Path, Rattling Investor Hopes
December meeting notes show officials see only one 25-basis-point cut in 2026, a more cautious approach than markets had priced in, stalling recent equity rallies.
A recent rally in U.S. stocks lost momentum after the Federal Reserve’s December meeting minutes revealed a more cautious and divided stance on future interest rate cuts than many investors had anticipated.
The notes, which followed a December rate cut, indicated that Fed officials are proceeding with caution. The central bank's updated "dot plot" projected a median estimate of just one quarter-point rate cut for all of 2026. This outlook clashes with more aggressive market expectations, which had priced in the possibility of two or more cuts during the same period, according to reporting by the Wall Street Journal.
The divergence poured cold water on investor hopes for a swift return to looser monetary policy. The minutes detailed a committee grappling with persistent inflation that remains above their 2% target, justifying a slower pace of easing. The summary characterized the December decision as a "hawkish cut"—a move to lower rates while simultaneously signaling that further reductions are not guaranteed and would be highly data-dependent.
Further highlighting the internal debate, the notes revealed that three officials dissented from the December decision. Two members argued for holding rates steady, while one advocated for a more aggressive 50-basis-point cut, underscoring the deep divisions within the Federal Open Market Committee (FOMC) on the appropriate path forward.
The market’s reaction was swift but measured. Major stock indices, which had been climbing on dovish expectations, flattened in trading following the 2:00 PM ET release. In the bond market, Treasury yields ticked higher as traders recalibrated their rate forecasts. The CME FedWatch tool now indicates an 83.9% probability of rates remaining unchanged at the upcoming January meeting, cementing the idea of a central bank in a holding pattern.
Analysts suggested the minutes serve as a reality check for a market that may have gotten ahead of itself. "We are anticipating a slow pace of rate cuts in 2026," noted Cooper Howard, a strategist at Charles Schwab, who foresees one or two more cuts as the Fed balances stubborn inflation against a cooling labor market. This sentiment reflects a broader shift from a presumed dovish pivot to a more deliberate, meeting-by-meeting evaluation of economic data.
With the Fed’s cautious stance now public, all eyes will turn to upcoming reports on inflation and employment. The official minutes released by the Federal Reserve confirm that these metrics will be the ultimate arbiters of the speed and scale of monetary policy adjustments through 2026, leaving investors to navigate a period of heightened uncertainty.