Federal Reserve Cuts Interest Rates by 25 Basis Points, but a Hawkish Outlook Lies Ahead

Ahead of the Federal Reserve’s final meeting of the year yesterday, market consensus was clear: a 25-basis-point rate cut was priced in with a 95% probability. And the market was correct—the Fed delivered its third consecutive rate cut. However, statements following the decision hinted at a more hawkish outlook moving forward.

The hawkish tendencies became evident when the Fed raised its projections for future rates through the so-called dot plot.

FOMC Participants’ Assessments of Appropriate Monetary Policy: The median target range or level for the federal funds rate. Source: federalreserve.gov

Expectations had shifted significantly: the forecast for December 2025 rose from a previous 3.4% to 3.9%. The projection for December 2026 was adjusted upward from 2.9% to 3.4%, and for December 2027, from 2.9% to 3.1%.

The Fed also noted the need to prepare for potential impacts from fiscal policies under incoming President Donald Trump, who has signalled plans for tariffs, tax cuts, and mass deportations—measures that could fuel inflation and complicate the central bank’s work. Some members factored these potential impacts into their decisions, while others did not.

“I just think we need to take our time, not rush, and make a very careful assessment, but only when we’ve actually seen what the policies are and how they’re implemented,” Powell said regarding Trump’s plans. “We’re just not at that stage.”

Following the decision, the U.S. dollar climbed 1.2%, reaching its highest level in two years, triggering a sharp sell-off in both U.S. and international equities. The S&P 500, a stock index tracking 500 large publicly traded companies, fell nearly 3%. Prices for U.S. Treasury bonds also declined, pushing the yield on two-year Treasuries—particularly sensitive to policy changes—up by 11 basis points to 4.35%.

With the Fed signalling a more hawkish stance and revising rate projections upward, the central bank clearly intends to exercise caution with further easing. Going forward, the focus will remain on monitoring inflation trends, with the Fed reiterating its commitment to combating inflation. It expressed confidence in achieving its target of bringing inflation down to 2%.