The Federal Reserve is expected to cut interest rates for a third straight meeting on Wednesday, but all eyes will be on its signals for 2026, as markets weigh whether the central bank will continue easing or hold steady.
The move would lower the federal funds target range to 3.50%–3.75%, down from 4.25%–4.50% in August and well below the cycle peak of 5.25%–5.50% held from mid-2023 to late 2024.
Despite uneven data flows caused by the government shutdown, markets have steadily increased their bets on a rate cut, though expectations for 2026 have shifted sharply.
After October’s meeting, Fed Chair Jerome Powell warned that a December cut was “not a foregone conclusion,” but softer private-sector payrolls and still-contained inflation risks appear to have tipped the balance. Inflation has been hovering around 3%, above the Fed’s 2% target, though many economists expect price pressures to continue easing into 2026.
Even with a cut, borrowing costs along the curve may remain elevated. Treasury, corporate and municipal debt issuance fueled by budget deficits, AI-related capital spending and state-level borrowing has pushed investors to demand higher term premiums, keeping long-dated yields elevated.
Hawkish cut expected
Kathleen Brooks, research director at XTB, said the Fed is likely to announce a 25bp rate cut, but noted that the outlook is less clear as bond traders have scaled back expectations for future easing, now pencilling in just two cuts in 2026.
Only two further reductions are expected throughout 2026, Brooks noted. “This is an abrupt shift from a week ago when three rate cuts were expected, and it follows a hawkish shift in other regions,” she added. “This leaves the Fed and the BOE as outliers, and could impact the performance of the dollar and the pound in the coming months.”
According to Brooks, the November payrolls report, due December 16, could have more influence on the dollar than today’s FOMC decision, with options markets pricing a larger move based on jobs data than on the Fed meeting.
Focus on dot plot and dissents
Ipek Ozkardeskaya, senior analyst at Swissquote, said market odds leave little room for surprise. “Everybody knows the Federal Reserve will announce a 25bp rate cut today… too high for the Fed to walk back in the absence of an emergency,” she said.
The uncertainty lies in 2026 guidance. Ozkardeskaya said doves point to a softer labor market and minimal tariff-driven price pressures, with political commentary from President Donald Trump adding pressure for cuts. Some, including the White House’s Kevin Hassett, argue the Fed has “plenty of room” to ease due to AI-driven productivity gains, but others warn that tariff-related inflation risks remain.
“All eyes will be on the Fed’s dot plot,” she said, noting that even minor shifts in individual projections could move market expectations.
Michael Brown, senior strategist at Pepperstone, agreed with the 25bp cut prediction, but flagged the chance that five policymakers may dissent in favour of holding rates steady –potentially a record. The updated policy statement is expected to emphasise data-dependency, while Powell’s press conference will be closely watched for signals on whether policy remains restrictive.
“Last time out, Powell noted that a cut at the following meeting was ‘far from’ a foregone conclusion, which sparked a significant hawkish repricing of policy expectations,” Brown said.
“This time, the key things to watch will be whether Powell still views policy as restrictive, as well as whether the current stance is described as being in a ‘good place’, which would mirror the language used earlier in the year, to indicate a prolonged period on hold.”
With the cut largely priced in, the focus will be on the Fed’s guidance for 2026, the dot plot, and Powell’s messaging are all factors that could sway markets heading into the new year.