The triple game behind the Federal Reserve\'s continuous interest rate cuts

An interest rate resolution passed with a vote of 9 - 3 depicts the fierce tug of war within the Federal Reserve between inflation stubbornness and employment risks. The policy balance once again tilts towards preventive interest rate cuts amid subtle data changes.

The Federal Reserve decided to lower the target range of the federal funds rate by 25 basis points to 3.50%-3.75%, with a vote of 9 to 3. This is the third consecutive interest rate cut since September this year.

Also announced simultaneously with the interest rate decision, there was another important balance sheet operation: the Federal Reserve announced that it would purchase $40 billion in treasury bonds within 30 days starting December 12 to maintain an adequate supply of reserves.

I. Core of the resolution: precautionary interest rate cuts and subtle wording adjustments

● The Federal Reserve\'s description of the current economic situation in its policy statement has undergone subtle but critical changes. The statement noted that \"economic activity is expanding at a moderate pace\" while acknowledging that \"employment growth has slowed this year and the unemployment rate has risen as of September.\"

Compared with previous statements, the description of the unemployment rate as \"low\" has been deleted this time, an adjustment that reflects actual changes in the labor market.

● In terms of inflation, the Federal Reserve admitted that \"inflation has increased compared with the beginning of the year and is still at a high level.\" The statement maintained previous vigilance against inflationary pressures and echoed core inflation data of 2.8% in September.

● Regarding the future policy path, the statement added new guidance, saying that the latest data, changes in the economic outlook and the balance of risks will be carefully evaluated when assessing the \"magnitude and timing\" of further adjustments. The wording change suggests that the Fed has increased flexibility for subsequent policies.

2. Internal game: Policy differences behind the 9 - 3 vote

● The voting results of this meeting showed obvious differences of opinion. Nine members supported a 25 basis point rate cut, while three members voted against it.

● Among the opposition, Director Steven Milan advocates a larger interest rate cut, preferring a one-time cut of 50 basis points. Chicago Fed President Austin Goolsbee and Kansas City Fed President Jeffrey Schmid opposed any rate cut and wanted to keep rates unchanged.

● This is the first time since 2019 that three officials voted against it at the same interest-rate meeting. The differences highlight different judgments within the Fed on economic risk assessments: one side is more worried about a weakening labor market, the other is more concerned about stubborn inflationary pressures.

3. Dot chart analysis: 2026-2027 interest rate path forecast

According to the newly released dot chart, Federal Reserve officials \'expectations for the interest rate path in 2026 are significantly divided.

● The dot chart shows that among the 19 FOMC members, 4 believe that interest rates should be kept unchanged in the range of 3.50%-3.75%, 4 support a 25 basis point cut, and 4 support a 50 basis point cut. Three others believe that interest rates should be lowered below 3%, and three others even believe that interest rates should be raised by 25 basis points.

● Despite differences, median forecasts show officials expect interest rates to be cut by 25 basis points in 2026 and 2027. This means that based on current levels, interest rates may fall to the range of 3.00%-3.25% by the end of 2027.

4. Technical expansion: The essence of the US$40 billion bond purchase plan

● In addition to the decision to cut interest rates, the Federal Reserve also announced an important balance sheet operation. The committee judged that \"the reserve balance has dropped to an adequate level\" and decided to initiate the purchase of short-term US Treasury bonds.

● The purchase scale for the first month is set at US$40 billion and may remain at a high level in the coming months to relieve pressure on the money market. Powell emphasized at the press conference that such operations are \"purely to maintain an adequate supply of reserves\" and have nothing to do with monetary policy stance.

● This operation marks an important adjustment in the Federal Reserve\'s monetary policy implementation framework. Just two weeks ago, the Federal Reserve just ended its three-year quantitative tightening (QT) policy, shrinking its balance sheet by letting bonds mature and not be renewed.

5. Economic Outlook: Increase in growth expectations and downgrade in inflation forecasts

● In terms of economic forecasts, Federal Reserve officials are more optimistic about their growth expectations for 2026, while their inflation forecasts are slightly lowered.

● Based on the latest forecast, officials raised their median forecast for GDP growth in 2026 to 2.3% from 1.8% in September, showing increased confidence in economic resilience.

● In terms of inflation expectations, the median forecast for personal consumption expenditure (PCE) inflation rate at the end of 2026 was lowered to 2.4% from the September forecast of 2.6%, but it is still above the long-term target of 2%. The adjustment reflects the Fed\'s expectations for a gradual decline in inflation, but acknowledges that the decline process may be slow.

6. Policy background: complex data environment and external pressure

● This policy decision was issued under the complex economic data environment and external pressure. Unemployment has risen to 4.4% in September from 4.1% in June, while inflation remains high at 2.8%.

● The government shutdown further complicated the policy outlook, forcing the postponement of the release of some key economic data. This data incompleteness makes it more difficult for the Fed to make decisions.

● External political pressure is also increasing. President Trump has said he will decide who will take over as chairman of the Federal Reserve after Powell\'s term expires in May 2026, and has hinted that the candidate will be officially announced early next year. The White House has repeatedly criticized the Federal Reserve for not cutting interest rates quickly enough, raising concerns about whether the central bank\'s independence is threatened.

VII. Market Impact: From expected management to actual operation

● The Federal Reserve\'s policy mix-preventive interest rate cuts and technical balance sheet expansion-will have multiple impacts on the market. The decision to cut interest rates itself has been widely expected by the market, but the degree of internal disagreement exceeds the expectations of some investors.

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

● This arrangement reflects the lessons learned by the Fed from the turmoil in the repo market in 2019. At that time, quantitative tightening lasted for too long, causing violent 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 fluctuated violently during the session. Markets are digesting the dual signals of uncertainty over interest rate paths and balance sheet expansion.

The deep differences revealed by the dot chart suggest that every step of the Fed\'s future actions may be accompanied by fierce internal debate. As the April 2026 tax season approaches, the monthly bond purchase scale may drop from US$40 billion to US$20 - 25 billion, but this \"technical expansion\" has essentially injected liquidity into the market.

New York Fed President Williams once admitted that judging whether the market has \"sufficient reserves\" is \"an inaccurate science.\" At this crossroads, every step the Fed takes is like sailing cautiously in uncharted waters.