The Federal Reserve is "not as hawkish as imagined," Wall Street maintains its rate cut bets, and both the Morgan group and Citigroup expect another rate cut in January

After the Federal Reserve's December interest rate meeting, which lowered rates by 25 basis points as expected, major Wall Street investment banks maintained their expectations for future rate cuts, believing that although the decision had a somewhat hawkish tone, the overall stance was not as hardline as the market had previously feared.

Major Wall Street investment banks maintained their expectations for subsequent rate cuts after the decision. JP Morgan and Citigroup predict another rate cut in January next year, judging that the easing cycle has not yet ended. Goldman Sachs and Barclays analyzed that the hawkish wording in the policy statement aimed to "balance" this rate cut and avoid sending an overly accommodative signal.

This decision also reflects significant internal divisions within the Federal Reserve. The voting result of the Federal Open Market Committee was 9 to 3, with the number of dissenting votes being the highest since 2019, highlighting that there is still controversy over the monetary policy path. The policy statement restored the wording of "considering the degree and timing of future adjustments," and Chairman Powell also emphasized multiple times that they are "in a favorable position to wait for the next steps," indicating that the Federal Reserve has shifted to a more cautious "data-dependent" mode.

Rate Cuts Become Mainstream Prediction for Next Year

There remains significant divergence in the market regarding the Federal Reserve's rate cut path in 2025, but most institutions maintain expectations for a rate cut in January next year.

Citigroup, Morgan Stanley, and JP Morgan all point to January next year as the timing for the first rate cut, with Citigroup expecting another cut in March, Morgan Stanley predicting a second cut in April, while JP Morgan believes that the policy will then enter an observation period.

Goldman Sachs, Wells Fargo, and Barclays expect the rate cut window to open in March, with a possible second cut in June. Standard Chartered Bank maintains its judgment that there will be no rate cuts throughout 2025, noting that the recent policy communication from the Federal Reserve has more boosted market risk sentiment and has not conveyed a fundamental shift in the policy path.

Record High Voting Divisions and Upgraded Economic Expectations

The most notable feature of this meeting is the widening divisions within the FOMC. In addition to Schmid and Goolsbee, who advocated for keeping rates unchanged, Miran argued for a larger cut of 50 basis points. In the dot plot forecast, there were six "soft dissent" opinions for 2026, slightly leaning hawkish.

The Federal Reserve also upgraded its economic growth expectations for the coming years. The GDP growth forecast for 2026 was raised from 1.8% to 2.3%, and from 1.9% to 2.0% for 2027. According to Goldman Sachs analysis, this reflects the resilience of consumer spending, increased AI capital expenditures, and a rebound after the impact of government shutdowns dissipates.

Regarding inflation expectations, the core PCE inflation rate was slightly lowered to 2.4% for 2026, and the unemployment rate is expected to peak in 2025. Although the median in the dot plot remains unchanged, indicating that there will be one rate cut each in 2026 and 2027, there is still controversy within the committee regarding the policy path.

Powell Emphasizes "No Pre-set Path"

At the press conference, Federal Reserve Chairman Jerome Powell reiterated the dual mandate and emphasized that due to a lack of incremental data, changes in employment and inflation expectations are minimal. He made it clear that no decisions have been made regarding the January meeting, and currently, no one is considering an interest rate hike as the baseline scenario.

Powell pointed out that future policy choices are not a binary risk between rate cuts and hikes, but rather a trade-off between "keeping rates unchanged" and "the magnitude of rate cuts." Regarding the labor market, he mentioned that job growth may have been overestimated by about 60,000, implying that the average monthly employment figure may have actually decreased by 20,000 since April.

Goldman Sachs interprets that after a cumulative rate cut of 75 basis points since September, the FOMC currently believes there is ample space to observe the situation's development, suggesting that the duration at this interest rate level may be extended in the future. Powell emphasized that between the inflation and employment targets, "there is no risk-free path for policy."

Restarting Bond Purchases to Maintain Liquidity

In addition to the interest rate decision, the Federal Reserve also announced significant balance sheet operations. The committee determined that bank reserve balances have fallen to "ample levels," and therefore will begin purchasing short-term Treasury securities starting December 12 to maintain this level.

According to Goldman Sachs, citing information from the New York Fed, these purchases will amount to approximately $40 billion per month. Combined with the $20 billion monthly reinvestment of mortgage-backed securities, the total amount of Treasury securities purchased by the Federal Reserve in the coming months will reach about $60 billion per month.

The New York Fed noted that as the balance of the Treasury's general account declines, the pace of purchases may slow after April. This initiative aims to ensure ample liquidity, avoid turmoil in the money market, and provide additional policy support signals to the market