Federal Reserve Signals 'Hawkish Cut' Amid Caution on Future Rate Cuts

The Federal Reserve is poised to lower its benchmark interest rate by 25 basis points in its December 2025 meeting, marking the first adjustment in over a year. While the cut is widely anticipated, policymakers are emphasizing a measured path forward, indicating that the next rate reduction will likely be delayed until mid-2026. This 'hawkish cut' reflects a shift in tone from previous easing cycles, with officials expressing concern over core inflation remaining above the 2.5% target. The decision follows a series of data points showing resilient labor markets and sticky services inflation. Job growth in November exceeded expectations, with nonfarm payrolls rising by 187,000, while the unemployment rate held steady at 4.1%. Core PCE inflation, the Fed’s preferred gauge, remained at 2.7% on a year-over-year basis, underscoring the challenge in achieving sustained disinflation. Market participants are adjusting their outlook: the CME FedWatch Tool now reflects a 68% probability of a single rate cut in 2026, down from 83% earlier in the year. The yield on the 10-year Treasury note rose to 4.23% following the pre-meeting consensus, indicating investor anticipation of prolonged higher rates. Financial conditions have tightened, with mortgage rates climbing above 7.1% and the dollar index reaching a 14-month high. Corporate bond spreads have widened, particularly in the high-yield sector, as investors price in extended duration of restrictive policy. The move also affects global markets, with the euro and yen weakening against the dollar, and emerging market debt yields rising. The Fed’s composition of the Federal Open Market Committee (FOMC) remains split, with three members voting for no change and two supporting a 50-basis-point cut, though the final decision reflects a consensus for a restrained 25-basis-point reduction.