The US Federal Reserve (Fed) cut the federal funds rate by 0.25% to 3.50%-3.75%, but there was significant division among Fed governors about future rate moves.

The Fed’s latest economic projections modestly increased to 1.7% for 2025 and moderately increased to 2.3% for 2026 vs. the previous estimate of 1.8%. The hit to growth in the fourth quarter driven by the government shutdown will contribute to growth in 2026, in addition to the One Big Beautiful Bill Act (OBBBA) stimulus. 

Unemployment rate forecasts were essentially unchanged while both headline and core personal consumption expenditure (PCE) forecasts were nudged 0.1% lower for 2025 and 2026 to 2.9% and 2.4%, 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 2026 and in 2027. 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 in the bond market saw two-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 US avoiding a recession as a constructive combination for risk assets entering 2026. However, with rich valuations in some parts of the global equity market, such as US 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.