Is the U.S. finished with cutting rates?

The U.S. Federal Reserve (Fed) delivered on market expectations and reduced the target federal funds rate by 0.25% to 3.50%-3.75%, but with three Federal Open Market Committee (FOMC) voters dissenting. Both the votes and the updated economic and policy rate forecasts show greater divergence in views amongst FOMC members. Interim governor, Stephen Miran dissented in favor of a larger half percent cut, while Governors Schmid (Kansas City) and Goolsbee (Chicago) voted in favor of no further reductions. Moreover, outside of the twelve voting members, four members within the total FOMC body of nineteen who submit projections, elected for no cuts, a few of whom may be rotating onto the committee next year.

Adjustments to the statement language were uncontroversial, though the small tweak stating “in considering the extent and timing of additional adjustments” to policy rates suggests a January reduction is unlikely. Elsewhere, moderate changes to the committee’s Summary of Economic Projections (SEP) tilt hawkish:

• Growth was nudged higher by 0.1% to 1.7% for this year but was jolted higher for 2026 to 2.3% from 1.8%. It is expected that the hit to growth in the fourth quarter driven by the government shutdown will contribute to growth next year, in addition to the One Big Beautiful Bill Act (OBBBA) stimulus. 
• Unemployment rate forecasts were essentially unchanged.
• Both headline and core personal consumption expenditure (PCE) forecasts were nudged lower through next year. This year was adjusted to 2.9% and 3.0%, and to 2.4% and 2.5% for 2026, respectively. The committee continues to see tariffs as a one-time boost to inflation but expects this will subside relatively quickly.
• The median interest rate outlook maintained just one cut for next year and in 2027. That said, the most hawkish members see no further rate cuts through 2027 while the most dovish members see rates falling to 2.4% over that time. 

Initial reactions saw 2-year yields drop, but 10-year yields rose and ended the week higher on what was seen as a “hawkish” cut after the markets digested the latest Fed guidance.

We still see room for rate cuts in 2026, especially if the job market turns out to be softer than the Fed's forecast. That said, with the tax rebates to households in the first half of 2026, there could be bouts of economic strength during this time that would persuade the Fed to slow down on monetary easing. Moreover, a new Fed chair taking over in May could also add a dovish tilt to the committee.

Overall, we see the combination of lower interest rates and the U.S. avoiding a recession as a constructive combination for risk assets entering 2026. That said, with rich valuations in some parts of the global equity market, such as in U.S. technology, investors will need active management to select companies that have strong long term earnings growth prospects. Asia, including China, should still benefit from solid export demand, while artificial intelligence development in China could offer new growth opportunities. 

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