Fed Watch: Recalibrating the “Recalibration”

Key Takeaways

• With a third consecutive rate cut bringing the Fed Funds range to 3.50%–3.75%, the Fed may pause for now as it reassesses the effectiveness of its “risk management” approach amid mixed economic signals.
• Deepening divisions within the FOMC suggest that further easing will face a higher bar, especially as inflation remains above target and labor market data offers limited clarity.
• Investors should expect heightened data dependency going into 2026, with future policy direction hinging on labor market and inflation reports, which has important implications for fixed income positioning.
  

As was widely expected, the Federal Open Market Committee (FOMC) implemented another 25-basis-point (bp) rate cut at the December FOMC meeting, bringing the new Fed Funds trading range down to 3.50%–3.75%. With the resumption of rate cuts now at round three, and Chairman Powell referencing the resumption of rate cuts as a “risk management” approach, the more pertinent questions are: what will the Fed have in store for the markets in 2026, and will the voting members recalibrate the “recalibration”?

If you may recall, when the FOMC began this rate-cut cycle back in September 2024, Chairman Powell referred to it as a “recalibration” to monetary policy. With the Fed now implementing 175 bps’ worth of rate cuts over the last 15 months, it appears as if the broader sentiment within the U.S. central bank may now be to “wait out the data” to see if any potential easing in policy is warranted at this stage.

This point has been underscored by many of the regional Fed bank presidents and, as I recently blogged, has created an impression of the Fed being a “house divided.” In fact, in order to get this latest rate cut implemented, Powell no doubt had to acknowledge this rift existed and make some compromises about the direction of monetary policy going forward. Nevertheless, this process did not appease every voting member, and once again, the official policy statement includes dissenters.

Based upon the broader economy pre-government shutdown, there apparently didn’t seem to be a need to go into an “accommodative phase” for policy just yet, but perhaps just get back to “neutral.” This is a point Powell & Co. have been making as well. Now, what is a neutral Fed Funds Rate? That is the key question. If you believe it begins at perhaps 3.50%, then guess what? We are essentially at neutral.

However, the Fed and, of course, the money and bond markets, are now back to being highly data-dependent. Why “highly,” you may be asking? Well, the Fed Funds Rate has already been cut by 75 bps over the last three months, so you can make the case that the Fed may now be far less behind the curve than it was pre-September. Thus, future rate cuts will hinge directly on incoming economic reports. With inflation still about a percentage point above the Fed’s own 2% target, the FOMC will need to see additional cooling in the labor markets to spur additional rate-cutting action. 

Unfortunately for the Fed, the December FOMC meeting was also a bit “cloudy” on the data front, even with the shutdown over. The all-important November (and some October) jobs report was not available and is not slated for release until December 16. The more recent employment-related numbers have been somewhat mixed, but weekly jobless claims have continued to suggest the “no hire, no fire” scenario remains in place.

The Bottom Line

With the less consensus-driven rate cut among the voting members now “in the books,” the bar has probably been raised for future rate cuts, to some degree. In other words, the “rate cut crowd” in the Fed got what it wanted, so now it’s up to the data from here on out to get the more “hawkish” members on board.

—

Originally Posted December 10, 2025 – Fed Watch: Recalibrating the “Recalibration”