The Fed Is Ready for a “December Reset”: What Markets Should Expect From the Next Rate Cut
The Fed Is Ready for a “December Reset”: What Markets Should Expect From the Next Rate Cut
Markets are pricing in a quarter-point Fed cut to the 3.50–3.75% range, yet the tone of the statement and Powell's press conference matters more than the cut itself. FOMC members remain split: one camp wants lower rates to protect the weakening labor market, the other warns that easing already risks reigniting inflation.
AI-driven macro models show rising uncertainty in short-term USD volatility: the dollar's reaction will depend not on the rate cut, but on how aggressively the Fed signals the end—or continuation—of the easing cycle.
AI-driven macro models show rising uncertainty in short-term USD volatility: the dollar's reaction will depend not on the rate cut, but on how aggressively the Fed signals the end—or continuation—of the easing cycle.
A rate cut that comes with a warning
For the third time in a row, the Federal Reserve is preparing to lower the federal funds rate. Markets have finally settled on the scenario of a quarter-point move—a decision that is essentially already integrated into the prices of the dollar, stock indices, and government bonds.What is not priced in—that's the tone of the statement. That's why the term "hawkish cut" dominated the meeting : a rate cut accompanied by a stern signal that further easing isn't guaranteed.
This approach is a true reflection of the internal struggle within the FOMC. Some members are convinced that the labor market is cooling faster than desired. Others are confident that further rate cuts will undermine the fight against inflation, which remains above target.
The Fed Is Ready for a “December Reset”: What Markets Should Expect From the Next Rate Cut
Why is the committee divided?
The current economic picture simultaneously provides arguments for both sides.Official statistics are scant due to the partial government shutdown, but data from private agencies shows a slowdown in hiring, an increase in layoffs, and a decline in the number of job openings. This strengthens the position of the "doves," who believe the labor market needs to be secured in advance.
Inflation remains sticky. The Fed's latest report shows an annual rate of 2.8%—below Wall Street forecasts, but still significantly above target. For hawks, this is a clear signal: easing has already gone far enough, and the Fed risks losing control of price pressure.
It was against this backdrop that Loretta Mester voiced her opinion that inflation “is kept above target not only because of tariffs,” making a sharp easing of policy dangerous.
What Powell's message is likely to be
Jerome Powell's press conference traditionally sets the tone for the dollar. He is expected to repeat the idea that the committee "made an adjustment, but now must evaluate the impact of the steps already taken." Such a signal would confirm that the downward cycle is heading for a pause.Goldman Sachs and other major banks are bluntly stating that the bar for future rate cuts will be raised. This means the Fed will take action, but won't allow markets to expect a quick or automatic continuation of the cycle.
Dot plot: the real market trigger
Investors will be closely monitoring the updated dot plot .It's the only tool that provides a non-personal view of the 19 FOMC members' views on future interest rates.
If a strong divergence of opinions emerges at these points, this will increase dollar volatility.
If the majority pauses after the current decline, the market will quickly shift expectations to a stricter policy in early 2025.
Furthermore, forecasts for GDP, unemployment, and inflation are taking on new importance.
The market is eager to see how the Fed assesses the impact of tariff policy and the cooling labor market on the inflation trajectory.
Balance sheet and liquidity: the quiet second front
Another factor is a possible signal of changes in asset balancing.In October, the Fed signaled it would pause QT (balance sheet reduction) and allow bonds to mature. However, pressure on the overnight financing market could force the committee to consider partially resuming purchases. This wouldn't constitute QE , but it would serve as a mechanism for stabilizing liquidity—critical given the high stress on money markets.
Why this decision matters globally
The December meeting isn't just another decline.It's a turning point for the USD, gold, emerging currencies, Treasury yields, and all assets that react to the dollar's value.
If the Fed confirms the pause, the dollar could strengthen amid expectations of a tighter trajectory.
If Powell leaves room for another cut, markets will perceive this as a signal for a risk-on rally: stocks will rise, gold will be supported, and bond yields will decline.
December looks less like a routine monetary move and more like a global reset. The Fed is indeed prepared to lower rates, but the key will not be the move itself, but how clearly the regulator outlines the limits of further easing.
With the labor market cooling and inflation remaining above target, it is communication, not rates, that will determine the dollar's trajectory and investor sentiment in the first months of the new year.
With the labor market cooling and inflation remaining above target, it is communication, not rates, that will determine the dollar's trajectory and investor sentiment in the first months of the new year.
By Miles Harrington
December 10, 2025
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December 10, 2025
Join us. Our Telegram: @forexturnkey
All to the point, no ads. A channel that doesn't tire you out, but pumps you up.
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