"I'll Sing a Dove for Everyone" — December FOMC Commentary + Press Conference Minutes

One-sentence comment: A 25bps rate cut is in line with expectations, but the dot plot and press conference signals are more dovish than market expectations. This dovishness is reflected in three aspects. First, the market’s concern about the “hawkish dot plot” (e.g., no rate cuts in 2026) did not materialize; the dot plot significantly raised the projected economic growth for 2026-2027, lowered inflation expectations, and maintained the expectation of one rate cut per year, depicting a “Goldilocks” scenario. Second, the press conference was more dovish than anticipated; Powell seemed to revert to the tone of the August Jackson Hole meeting, repeatedly emphasizing risks of deterioration in the labor market and downplaying upside inflation risks. Third, starting December 12, the balance sheet will undergo technical expansion (RMP), with an initial purchase amount of $40 billion per month, slightly exceeding expectations in both scale and timing.

I. Five comments on the FOMC

1. Reasons for and disagreements over the 25bps rate cut?

At the press conference, Powell explicitly stated that the softening of the labor market and the “as expected” decline in inflation are reasons to cut 25bps now (rather than waiting until January next year) in the absence of new data.

But disagreements have increased further. Compared to the two dissenting votes in September (Miran suggested a 50bps cut, Schmid suggested no cut), this meeting saw three dissenting votes: Miran supported 50bps, while Schmid and Goolsbee recommended no cut. Notably, there were also four “soft dissent” votes, meaning those who projected only two rate cuts in 2025 in the dot plot (implying no cut this month) but did not dissent formally. These may include hawkish speakers who are not voting members in 2025 (e.g., Logan and Kashkari), or members who voted in favor despite the dot plot not supporting cuts (e.g., Collins and Musalem).

2. Future rate cut path?

On one hand, the statement (as expected) signals a “wait and see, no rate cut now” stance early next year. The statement changed the language regarding the conditions for adjusting future rates from “In assessing the appropriate stance of monetary policy” to “In considering the extent and timing of additional adjustments to the target range for the federal funds rate,” a wording change that appeared at the December 2022 FOMC meeting, usually indicating a pause in the near term. However, considering that the market’s expectation for two rate cuts in 2026 is already modest, the Fed signaling a pause early next year is not surprising.

On the other hand, the dot plot still maintains expectations of one rate cut in 2026 and 2027. Previously, markets worried that due to more optimistic GDP outlooks and recent upticks in upstream commodity prices, coupled with internal divergence within the FOMC, the Fed might revise down the 2026 rate cut forecast to zero.

3. What signals are in the dot plot?

Keeping the path of rate cuts unchanged, raising GDP forecasts, and lowering inflation forecasts paint a very “Goldilocks” picture (better growth, lower inflation, gradual rate cuts). Overall, the signals are neutral, but slightly more dovish than market expectations beforehand. Specifics:

1) The 2026-2027 years still each show one rate cut, identical to the September SEP.

2) The 2026 GDP forecast was raised by 0.5 percentage points to 2.3%. Powell explained in the press conference that this was due to more optimistic expectations for productivity, consumption, and investment activity.

3) The 2026 PCE and Core PCE inflation forecasts were lowered by 0.2 and 0.1 percentage points respectively to 2.4% and 2.5%, while unemployment rate projections remained unchanged.

4. Dovish signals from the press conference?

1) Clear statement that “the next move is not a rate hike” (when responding to Nick).

2) Regarding employment, Powell explicitly said “employment data was already weak, and overestimated” (specifically referring to the QCEW annual revisions). Throughout the meeting, Powell repeatedly emphasized that “employment growth is actually negative” and highlighted nonlinear deterioration risks.

3) On inflation, Powell reiterated that in the baseline scenario it is not an issue, tariffs are one-off, and the softening labor market implies service sector inflation will be hard to rebound (evidence increasingly shows service inflation declining, and goods inflation is entirely concentrated in tariff-affected sectors).

Overall, Powell seemed to return to the tone of the August Jackson Hole meeting, re-emphasizing “employment risks,” which is good news for recently tense investors.

5. How to interpret the reserve management expansion (RMP)?

Although it involves bond purchases, unlike quantitative easing (QE), RMP aims to ensure that reserve levels and bank system demand grow naturally, leading to a relatively steady pace of purchases. The FOMC announced it would start on December 12 with a pace of $40 billion/month, likely maintaining a relatively high pace in the short term but gradually slowing down (Powell indicated an expected central tendency around $20-25 billion/month).

Two reasons underpin this:

1) Since October, liquidity pressures in the repo market have persisted (SRF usage has been above zero and the SOFR-ON RRP spread has remained over 15bps), so the Fed believes reserve levels are now sufficient (not excessive) to reach the “ample” balance sheet endpoint, enabling the next phase of natural expansion.

2) The FOMC anticipates that a sharp increase in the TGA during tax season in April next year will drain reserves substantially, so it is preemptively releasing liquidity.

On the technical side, aside from the slightly higher pace and earlier start, the RMP also allows purchases of short-term coupons of 1-3 years, which is a plus for the short end.

II. Quick notes from the press conference

1. Howard Schneider (Reuters):

First, about the statement, to clarify our understanding: does inserting the phrase “considering the extent and timing of additional adjustments” imply that the Fed is now on hold until clearer signals emerge from inflation, employment, or economic developments?

Powell:

Yes, the adjustments since September place our policy near the broad estimate of neutral interest rates. As we stated in today’s statement, we are in a position to determine the extent and timing of additional adjustments based on incoming data, evolving outlooks, and risk assessments. This wording indicates we will carefully evaluate incoming data. Additionally, I want to note that since September, we’ve lowered the policy rate by 75 basis points, and since September last year, by 175 basis points, with the federal funds rate now within the broad estimated range of neutral. We are positioned to wait and observe how the economy evolves.

Howard Schneider (Reuters - follow-up):

May I ask about the outlook? It seems that with GDP growth increasing, along with easing inflation and a relatively stable unemployment rate, the outlook for next year is quite optimistic. What is causing this? Is it early bets on AI? Some sense of productivity gains? What’s driving all this?

Powell:

Many factors are at play. Broadly, external forecasts also show some pickup in growth. Partly because consumer spending remains resilient; on the other hand, data center spending related to AI has been supporting business investment. Overall, the baseline outlook from the Fed and external forecasters is that growth will rebound from the relatively low 1.7% this year to around 2.3% next year. The median in SEP is 1.7% growth this year, rising to 2.3% next year. Part of this is due to the government shutdown; you can shift 0.2 percentage points from 2026 into 2025, making it about 1.9% and 2.1%. But generally, fiscal policy will be supportive, as AI expenditure continues, and consumers keep spending. The baseline looks for steady growth next year.

2. Steve (CNBC):**

Thank you, Mr. Chair. You previously described rate cuts using a risk management framework. To follow up on Howard’s question, has the risk management phase for rate cuts ended? Given the employment data we might get next week, have you taken sufficient “insurance” against potential weakness?

Powell:

Between now and the January meeting, we’ll get a lot of data that will inform our considerations. If you look back, we kept rates at 5.4% for over a year because inflation was very high and the labor market was very strong. Last summer (summer 2024), inflation declined, and the labor market began showing real signs of softening. So we decided, as our framework suggests, that when risks to two goals become more balanced, we should shift from leaning toward addressing one (inflation) to a more balanced, neutral stance. We did that. We eased some, paused to observe mid-year developments, then resumed cuts in September. We’ve cut 175 basis points total. As I said, our current stance puts us in a position to wait and see how the economy evolves.

Steve (CNBC - follow-up):

May I ask about the SEP? Your forecast for growth has increased significantly, but unemployment has not fallen much. Is AI involved? What drives the momentum for more growth without a big drop in unemployment?

Powell:

That suggests higher productivity. Some of that could be AI. I also think productivity has structurally been higher over the past few years. If you start to think it’s around 2% annually, then you can sustain higher growth without creating many more jobs. Higher productivity is also a reason incomes can increase over longer periods. So, it’s generally a good thing, but it has that implication.

3. Colby Smith (The New York Times):

Today’s decision was clearly divisive. Not only were there two formal dissenters against rate cuts, but also four “soft” dissenters. I wonder, does this suggest that the threshold for supporting recent rate cuts is much higher now? If conditions are good now, what does the committee need to see to support a rate cut in January?

Powell:

As I mentioned, the situation is that our two goals are somewhat in tension. Interestingly, everyone at the FOMC agrees inflation is too high and should come down; at the same time, they agree the labor market is softening and faces further risks. All agree on that. The disagreement is how to weigh these risks, what your outlook is, and where you think the bigger risk ends up. Having this persistent tension is rare, and that’s what we see now. It’s actually what you’d expect. Our discussions are very thoughtful and respectful. People have strong opinions, and we come together to reach a decision. Today we did. Out of 12, nine supported the decision, so support is broad. But it’s not as unanimous as usual; opinions are more dispersed, which I think is inherent in this situation.

As for conditions needed, we all have outlooks for the future. But I think, given that we’ve already cut 75 basis points and those cuts are just beginning to impact the economy, we’re in a good position to wait and see. We’ll get plenty of data. And we need to assess carefully, especially the household survey data. Due to very technical reasons (how data is collected), these can be distorted—not just by volatility, but by actual bias. This is because data collection in October and November was partial. So we need to look carefully, with skepticism. Nonetheless, by the January meeting, we’ll have a lot of data from December.

Colby Smith (The New York Times - follow-up):

Regarding dissent, given the complex economic environment, could there be a point where these disagreements become counterproductive, regardless of what the Fed communicates or how future policy paths are conveyed?

Powell:

I don’t think we’re at that point. I would reiterate that these are good, thoughtful, respectful discussions. You’ll hear many—including external analysts—say the same: “I could justify either side.” It’s a close call. We have to make a decision. In this context, if you look at the SEP, you’ll see many agree that risks to unemployment are skewed upward, and inflation risks are also skewed upward. So what do you do? You have only one tool, and you can’t do both at once. So, at what pace to move? How large a move? It’s a very challenging situation. I think we’re in a good position to wait and observe how the economy unfolds.

4. Nick Timiraos (The Wall Street Journal):

There’s been some discussion about the 1990s. In the 90s, the committee made two separate easing sequences, each cutting 75 basis points (1995-96 and 1998). After those, the next move was upward, not downward. Now, with policy closer to neutral, is the next rate action necessarily a cut? Or should we consider policy risk as truly two-way from now on?

Powell:

I don’t think rate hikes are the baseline scenario for anyone right now (base case). I haven’t heard anyone say that. You see some think we should pause here, in a good position, just waiting. Others think we should cut once or more this year and next. But when people write policy estimates, it’s either to stay here, cut a little, or cut more. I don’t think the baseline includes hikes. You’re right—the two episodes in the 1990s involved three cuts before shifting to hikes.

Nick (The Wall Street Journal - follow-up):

May I ask, for most of the past two years, the unemployment rate has been rising very slowly, and today’s statement no longer describes it as “staying low.” What gives you confidence it won’t continue rising into 2026, especially considering that housing and other interest-sensitive sectors still seem to feel the restrictive effects of policy?

Powell:

I think the current view is that, since we’ve already cut 75 basis points and policy is in a reasonable range of neutral, that will help stabilize the labor market—or only increase by one or two more points—but we’re not seeing any evidence of a sharp decline. And we’re not seeing that evidence at all right now. Also, policy remains not accommodative. We believe this year we made progress on non-tariff inflation. As tariffs take effect, next year it will show more clearly. But as I said, we are in a position to wait and see what the outcomes are.

5. Claire Jones (Financial Times):

Many interpret your October comments—“when in doubt, slow down”—as signaling no rate cuts now, but in January. So I wonder, why did the committee decide to act today rather than wait until January?

Powell:

I said in October there was no certainty about action, which remains true. Why did we act today? I’d point out a few reasons. First, the labor market continues to cool gradually. Unemployment rose 0.3 percentage points from June to September. Since April, monthly job gains averaged about 40,000. We believe these figures are overestimated by about 60,000, so in reality, monthly employment might be declining by 20,000. Moreover, household and business surveys show that labor demand and supply are declining. So the labor market continues to slow, perhaps a bit faster than we thought.

Regarding inflation, data is slightly lower. Evidence increasingly shows service sector inflation declining, offset by rising goods prices, which are entirely tariff-related. Over half of the excess inflation comes from goods, i.e., tariffs. We have to ask: what are our expectations for tariffs? To some extent, it depends on whether we see broader overheating in the economy. We see wage reports that don’t show that kind of overheating that would generate “Phillips curve” inflation. Considering all these factors, we made this judgment.

Claire Jones (Financial Times - follow-up):

On reserve balances, how concerned are you about the tensions we see in the money markets?

Powell:

I wouldn’t say “concerned.” The reality is that balance sheet runoff (QT) has been ongoing. The overnight RRP facility (ON RRP) is nearly at zero. Then, since September, the federal funds rate has been rising within the target range, almost reaching the IOER. That’s not a problem. It tells us we are in an ample reserve regime. We know this will happen. When it finally does, it might be a bit sooner than expected, but we are fully prepared to take the actions we discussed. These are the steps announced today: resume reserve management purchases. This is separate from monetary policy but necessary to keep reserves sufficient.

Why such a large scale ($40 billion)? Because April 15 (tax day) is approaching. People will pay large sums to the government, causing reserves to plummet temporarily. This seasonal pattern will happen regardless. Also, the sustained growth of the balance sheet requires us to add about $20-25 billion each month. So it’s just preparing for the mid-April tax flow.

6. Andrew:

This is the last FOMC press conference before the Supreme Court’s major hearing next month. Can you discuss how you hope the Supreme Court will rule? I’m curious why the Fed remains so silent on this key issue.

Powell:

Andrew, that’s not something I want to discuss here. We are not legal commentators. Engaging in public discussions on this would not be helpful during a court proceeding.

Andrew (follow-up):

Then, I’ll ask another question (Mulligan). I’d like to revisit the 1990s issue: do you think that’s a useful model for current conditions?

Powell:

I don’t think it rises to that level. It’s a very unique situation—not 1970s, but there is indeed tension between our two goals. This has been quite unique during my tenure at the Fed. Our framework says when this happens, we should take a balanced approach. It’s a highly subjective analysis. Basically, it tells you that when two goals are equally threatened, you should stay neutral. We’ve been moving toward neutral. Currently, we’re in the upper end of the neutral range. Coincidentally, we’ve cut rates three times. No decision yet on January.

7. Edward Lawrence (Fox Business):

I want to ask about inflation expectations in the SEP. Do you believe tariff price increases will fully transmit in the next three months? Is it a six-month process? Is that why employment remains a threat to the economy?

Powell:

Regarding tariff inflation, first tariffs are announced, then take effect, and then it takes months. Goods may need transportation, and a single tariff can take quite some time to fully impact. But once it does, the question is: isn’t that just a one-time price increase? If no new tariffs are announced, commodity inflation should peak around the first quarter next year. After that, it shouldn’t be very high. If no new tariffs occur, inflation should start declining in the second half of next year.

Edward (follow-up):

May I ask a very obvious question? The President has publicly discussed potential new Fed chair candidates. Does this hinder your current work or change your thinking?

Powell:

No.

8. Michael McKee (Bloomberg):

The 10-year yield is now 50 basis points above where it was when you started cutting in September 2024, and the yield curve has steepened essentially. Why do you think continuing cuts in the absence of data will lower that yield that has the biggest impact on the economy?

Powell:

Our focus is on the real economy. When long-term bonds fluctuate, you have to look at why. If you look at inflation expectations (breakeven inflation rate), they are at very comfortable levels consistent with 2% inflation. So the rise in yields is not driven by concerns about long-term inflation. It must be some other reason—like expectations of higher growth. Last year’s decline was also substantial and unrelated to us, caused by other developments.

Michael McKee (follow-up):

You mentioned that the public expects you to return to 2%, but most Americans list high prices and inflation as their top concerns. Can you explain to them why you prioritize the labor market (which seems relatively stable to most) over their primary concern—inflation?

Powell:

We hear clearly through extensive contacts that people are experiencing high costs. This is actually “High Costs,” not just current inflation but embedded high costs from 2022-2023’s high inflation. The best we can do is restore inflation to 2%, while maintaining a strong economy with rising real wages. It will take several years for nominal wages to outpace inflation enough for people to feel better about affordability. We are working to bring inflation down and support the labor market and strong wages.

9. Victoria (Politico):

This is the third rate cut this year, with inflation around 3%. Is the message that as long as people understand you want to return to 2%, you’re comfortable with the current inflation level?

Powell:

Everyone should understand that we are also committed to achieving 2% inflation. But this is a complex, unusual, difficult situation—labor markets are under pressure, job creation might be negative, and labor supply has declined sharply. The labor market appears to have significant downside risks. People are very concerned about this. The current story is that, excluding tariffs, inflation is just above 2%. So tariffs have caused most of the overshoot. We believe it’s temporary. Our job is to make sure it’s temporary. If inflation is high but the labor market is very strong, rates would be higher. But now, we face risks on both sides.

10. Elizabeth Schulze (ABC News):

Quick question: you’ve been saying employment growth is negative. Why do you think employment growth is much worse than official data suggests?

Powell:

Estimating employment growth in real-time is very difficult. They cannot survey everyone. Systematic overestimation has always existed. They revise twice a year. The last revision suggested an overestimate of 800,000-900,000, and that was indeed the case. We believe this overestimation persists and will be revised downward. We estimate about a 60,000 overestimate per month. So, 40,000 job growth could be negative 20,000. To some extent, this also reflects a sharp decline in labor supply. If in a world where workers aren’t growing, you don’t need many jobs to have full employment. But I think in a world with negative job creation, we need to be very cautious and ensure policies aren’t overly suppressing employment creation.

Elizabeth (follow-up):

Regarding supply, we see large employers like Amazon laying off workers citing AI. To what extent are AI factors contributing to employment weakness?

Powell:

That might be part of the story, but not the main one. If there were mass layoffs, you would expect continued increases in unemployment claims and new claims. But that’s not happening. That’s a bit strange. In the long run, AI could boost productivity and generate new jobs. But we’re still early, and we haven’t seen much of that in the data.

11. Enda Curran (Bloomberg):

Given the broad views within the policy committee, why are the perspectives of Reserve Bank governors and board members so divergent?

Powell:

They’re not that distinct. Each group has a variety of views internally. I don’t see it as a two-camp confrontation.

Enda Curran (follow-up):

If the Supreme Court overturns the current tariffs under review, what would be the economic impact on growth and inflation?

Powell:

I really don’t know. It depends on many unknown factors.

12. Christine Romans (NBC News):

I want to ask about a K-shaped economy. High-income households supported by home equity and stock wealth are boosting spending; but low-income consumers have struggled with five years of rising prices. Is this so-called K-shaped economy sustainable?

Powell:

We hear this often. Consumer companies serving low-income groups say people are tightening belts. But asset values (homes, securities) are high, often owned by high-income households. Whether that’s sustainable I don’t know. Most spending is indeed by those with more means. From a societal perspective, a strong labor market long-term is very beneficial—it helps lower-income people. That’s a state we all want to return to.

Christine Romans (follow-up):

Housing market remains weak. With these rate cuts, do we have a chance to improve housing affordability? The median age of first-time homebuyers is now 40—an all-time high.

Powell:

The housing market faces major challenges. I don’t think a 25-basis-point decline in the federal funds rate will make much difference. Supply is low. Many have mortgages at very low rates from the pandemic, making moving expensive. Plus, the country has a long-standing structural housing shortage. It’s a structural problem—not one that can be fixed by raising or lowering rates. We have no tool for that.

13. Chris Rugaber (Associated Press):

Wage growth is slowing. Where are the inflation risks? If inflation is cooling and employment growth might be negative, why aren’t we hearing more about rate cuts?

Powell:

Inflation risks are clear—tariffs are a big part. Most of us see that as a one-off. The risk is it could be more persistent than expected. A smaller risk is that overheating causes traditional inflation. I don’t think that’s very likely. The committee has different assessments.

14. Neil Irwin (Axios):

Do you think we’re experiencing a positive productivity shock (from AI or policy)? To what extent is that driving the higher GDP forecasts in the SEP?

Powell:

Yes, I’ve never thought I’d see five or six years of 2% productivity growth. That’s definitely higher. If you look at what AI can do, you see a promising productivity outlook. It might make users more efficient or force others to find new jobs. So yes, we are seeing higher productivity.

15. Matt Egan (CNN):

After today, there are only three meetings left with you at the helm. Have you thought about what you want your legacy to be?

Powell:

My goal is to hand over the economy in very good shape. To get inflation under control, back to 2%, and keep the labor market strong—that’s what I want to do.

Matt Egan (follow-up):

After your term ends, do you plan to stay on the Fed Board?

Powell:

I’m focused on my remaining time as Chair. No new updates on that.

16. Mark Hamrick (Bankrate):

Despite many prices remaining high, rate cuts mean savings rates (yields) have peaked, yet borrowing rates are still high. Many Americans face liquidity or emergency savings challenges. Is this collateral damage, or an unintended consequence of tools that are limited in addressing household liquidity constraints?

Powell:

I don’t see this as collateral damage of our policy. Over time, what we’ve done is to create price stability and maximum employment, which is very valuable for everyone. When we raise rates to reduce inflation, it does slow the economy, but we’ve already brought rates back to a level that is no longer strongly restrictive. I think it’s about helping people get out of high inflation. We’ve actually fared better than any other country through this global inflation wave. That’s due to the remarkable resilience of the U.S. economy. Thank you all.