Macro Strategy Report: In-Depth Analysis of the December 2025 FOMC Meeting
Forecasting the Federal Reserve’s Rate Decision and Monetary Policy Guidance Key Event: Statement by the Federal Open Market Committee (FOMC)
1. Executive Overview: “Driving in the Fog” and a Policy Turning Point
The final FOMC meeting of 2025 takes place against an economic and political backdrop that is unprecedented in the modern history of the Federal Reserve. Chair Jerome Powell and his colleagues will announce one of the most consequential policy decisions of this cycle, marking a transition from the post-pandemic “normalization” phase to a new era of cautious and inherently risky liquidity management.
Global financial markets are currently pricing in with near certainty (around 85–90%) that the Fed will deliver a 25-basis-point (bp) rate cut, lowering the federal funds target range from 3.75%–4.00% to 3.50%–3.75%.¹ This would be the third consecutive cut, following similar moves in September and October this year.
Behind this surface-level consensus, however, lie powerful undercurrents: deep internal divisions, a severe shortage of economic data due to a government shutdown, and a tectonic shift in the global liquidity regime.
This report argues that the December decision is not merely another step in monetary easing, but a tactical retreat taken as the Fed faces three converging pressures:
Data Fog: A six-week U.S. government shutdown has disrupted the flow of official statistics, forcing the Fed to decide policy without key October and November releases on inflation (CPI) and employment (Non-farm Payrolls).
End of Quantitative Tightening (QT): The Fed officially terminated its QT program on 1 December 2025 after shrinking its balance sheet by USD 2.43 trillion, while simultaneously being forced to inject USD 13.5 billion in emergency liquidity to stabilize the repo market.
Risk from the Bank of Japan (BOJ): Governor Kazuo Ueda is sending increasingly hawkish signals about a potential rate hike on 19 December, threatening to unwind a massive global carry trade.
We expect the outcome of the meeting to be a “hawkish cut”—a rate reduction accompanied by cautious, restrictive language that signals a possible pause or slower pace of cuts in 2026. The aim is to balance the risk of a labor-market recession against the threat of persistent inflation.
2. Rate Decision: Fragile Consensus and Internal Divisions
2.1 Base Case Scenario: A 25 bp Cut
Based on the CME FedWatch tool and interest rate swaps, markets have effectively priced in a 25 bp cut. This move is widely viewed as a necessary “insurance” cut. Even though official data are missing, private-sector reports such as ADP (showing a loss of 32,000 jobs) are flashing red signals about the health of the labor market.
With the unemployment rate having ticked up to 4.4% in the September data (before the shutdown), the Fed is under substantial pressure to act in defense of the “maximum employment” side of its dual mandate. Failure to cut could leave the Fed perceived as “behind the curve,” increasing the risk of an avoidable recession.
2.2 Deep Fissures Inside the FOMC
Consensus on the action does not mean consensus on the outlook. Nick Timiraos of The Wall Street Journal, often dubbed the “Fed Whisperer,” has described the current committee as “increasingly fractured.”
The October meeting already showed rare public dissent: Governor Stephen Miran voted for a deeper 50 bp cut, while Kansas City Fed President Jeffrey Schmid preferred to hold rates unchanged.
We expect the December meeting to register the highest number of dissenting votes since the early 1990s. This division stems from the lack of a shared “truth” in an environment of disrupted data:
Doves: Focus on weak private-sector data and systemic liquidity risks. They fear policy remains too tight.
Hawks: Focus on still-elevated services inflation (around 3% in September) and the rebound in equity markets. They fear additional easing will reignite inflation, especially ahead of potential new tariff policies under the incoming administration.
To secure a minimum consensus for a cut, Chair Powell will likely offer concessions in the statement, emphasizing data dependence and avoiding firm commitments on the 2026 trajectory.
3. “Data Fog”: Policy-Making in the Dark
3.1 Impact of the Government Shutdown
An unprecedented factor hanging over this meeting is the severe shortage of official economic data. Due to the six-week federal government shutdown triggered by a budget lapse, the Bureau of Labor Statistics (BLS) and the Bureau of Economic Analysis (BEA) have been unable to release key reports.
Specifically, the FOMC will enter the meeting without:
CPI for October and November: The November CPI is only scheduled for release on 18 December, a week after the meeting.
Non-farm Payrolls for October and November: Expected to be released on 16 December.
3.2 Risk of Policy Error
David Wilcox of the Peterson Institute for International Economics has likened this situation to the Fed “driving with a fogged-up windshield.” The Fed’s econometric models (such as FRB/US) rely heavily on these inputs to forecast inflation and growth.
The lack of data forces the Fed to lean more on soft data from the Beige Book. The October Beige Book already hinted at stagflationary dynamics: firms engaging in “opportunistic pricing” while hiring slows.
This creates a dilemma:
If the Fed cuts rates based on fear of recession, but the data released on 18 December later show a spike in inflation, its credibility will suffer and it may be forced into an abrupt policy reversal in early 2026.
This “blindness” also increases the uncertainty around the Dot Plot (discussed below), as FOMC members must make long-term projections based on fragile assumptions about the present.
4. System Liquidity: End of QT and the Era of “Abundant Reserves”
A crucial, potentially more structural announcement than the rate decision itself concerns balance-sheet policy.
4.1 Official Termination of Quantitative Tightening (QT)
On 1 December 2025, the Fed officially ended its Quantitative Tightening program. This concludes a 3.5-year campaign to drain excess pandemic-era liquidity, shrinking the balance sheet by roughly USD 2.43 trillion.
Ending QT was not a discretionary choice, but a technical necessity. Bank reserves fell below USD 3 trillion, touching what is widely viewed as the Lowest Comfortable Level of Reserves (LCLoR). Signs of stress in money markets became increasingly visible, reminiscent of the September 2019 repo turmoil.
4.2 Repo Shock and Emergency Liquidity Injection
Shortly after QT ended, on 2 December 2025 the Fed was compelled to inject USD 13.5 billion in emergency liquidity via overnight repo operations. This was the second-largest liquidity injection since the Covid-19 crisis, confirming that the U.S. financial system is facing acute cash shortages.
New Mechanism: Instead of allowing securities to roll off and disappear (runoff), the Fed is now reinvesting principal from MBS and Treasuries into Treasury bills (T-bills).
Why T-bills?
Shifting purchases toward T-bills (maturities under one year) injects liquidity directly into the short-term money market, lowering pressure on overnight rates (SOFR) without directly distorting longer-term yields.
Implication: This is effectively a form of stealth quantitative easing (QE) under the technical label of Reserve Management Purchases (RMP). It ensures that financial markets have sufficient “lubricant” to function, even before policy rates move substantially lower.
5. Global Interactions: Japan and the Carry Trade
While the Fed is easing, a headwind from across the Pacific threatens to complicate the picture. The Bank of Japan (BOJ) is emerging as the most dangerous “wild card” for U.S. markets this December.
5.1 Hawkish Signals from Governor Ueda
BOJ Governor Kazuo Ueda has sent his clearest signal yet of a possible rate hike at the 19 December 2025 policy meeting. Interest-rate swaps are pricing in a 76% probability that the BOJ will act.
Policy divergence: If the Fed cuts rates (lowering the cost of USD funding) while the BOJ hikes (raising JPY returns), the rate differential between the two currencies will narrow materially.
Japanese yen (JPY): The yen has already strengthened significantly, putting pressure on long-standing short-yen positions that have existed for decades.
5.2 Risk of a Yen Carry Trade Unwind
The end of QT in the U.S. and the potential BOJ hike together create a “perfect storm” for a reversal of the global yen carry trade.
Mechanism: For years, global investors have borrowed low-yielding yen (near 0%) to invest in higher-yielding U.S. assets such as Treasuries and tech stocks. The size of this trade is estimated in the trillions of dollars.
Spillover effects:
As the cost of yen funding rises and the yen strengthens, investors are forced to sell U.S. assets to repay yen liabilities.
This can trigger selling pressure on U.S. Treasuries (pushing yields higher, contrary to the Fed’s objectives) and U.S. equities, especially rate-sensitive tech names.
The Fed’s USD 13.5 billion liquidity injection can be seen as a pre-emptive defensive move, creating a liquidity buffer to absorb potential shocks from Japanese capital flowing back home.
6. The Dot Plot and the 2026 Outlook: Political Shadows
Market focus will extend beyond the December rate decision to the Summary of Economic Projections (SEP), particularly the updated Dot Plot for 2026.
6.1 Median Rate Forecast
Given the economy’s resilience and sticky inflation, major banks such as J.P. Morgan and Goldman Sachs expect the Dot Plot to show fewer cuts in 2026 than projected in September.
2025: The median rate is expected to cluster around 3.6%, consistent with a December cut.
2026: The median may now imply only two cuts (instead of the three to four previously expected), bringing rates down to roughly 3.375%–3.50%.
Neutral rate (r*): The Fed may raise its estimate of the long-run neutral rate to 3.0% or 3.25%, acknowledging that a world of higher inflation and public debt requires a higher equilibrium rate over the coming decade.
6.2 The Kevin Hassett Factor and Fed Independence
A politically sensitive variable creeping into market pricing is President Trump’s (implicitly) renewed suggestion that he may appoint Kevin Hassett to replace Jerome Powell when Powell’s term expires in May 2026.
Hassett effect: Hassett, former Chair of the Council of Economic Advisers, is seen as strongly pro-growth and more dovish on monetary policy than Powell. Markets currently assign a probability of over 70% that he will be nominated.
Market reaction: Expectations of a more politically “friendly” Fed chair in 2026 are causing a bear steepening of the yield curve. Long-term bond investors are demanding a higher risk premium due to fears that inflation will be tolerated under Hassett.
This diminishes the effectiveness of Powell’s “hawkish” messaging at the December meeting.
7. Cross-Asset Impact Analysis
Taking into account the rate cut, the end of QT, and the Japan-related risks, we outline the likely post-meeting market impacts:
7.1 U.S. Dollar (DXY) and FX
Outlook: Short-term weakness with high volatility.
Analysis: Rate cuts and liquidity injections are structurally negative for the U.S. dollar. In addition, if the “Hassett trade” continues to be priced in, expectations of looser policy in the future will further weigh on the dollar.
Risk: This weakness could be amplified if the BOJ hikes, driving USD/JPY sharply lower and pulling the DXY index below key support levels.
7.2 Gold and Commodities
Outlook: Positive price trajectory.
Analysis: Gold benefits from a double tailwind:
Lower opportunity cost as rates fall;
Safe-haven demand amid stagflation risk and political uncertainty around the Fed.
Goldman Sachs expects gold prices to remain strongly supported into 2026. The end of QT and the shift to an “abundant reserves” regime are fundamentally supportive for hard assets.
7.3 Crypto Assets (Bitcoin)
Outlook: Highly sensitive to net liquidity.
Analysis: Bitcoin has been trading with a high correlation to global liquidity. The Fed’s USD 13.5 billion injection and the termination of QT are strongly bullish signals. Tom Lee of Fundstrat has argued that halting QT could help Bitcoin reach new highs, as seen in past cycles.
Warning: Bitcoin is also sensitive to a potential carry-trade unwind. If U.S. equities sell off due to Japanese capital repatriation, Bitcoin could face short-term downside via risk-asset correlation.
7.4 U.S. Equities
Outlook: Year-end “Santa Claus rally” with an upside cap.
Analysis: The return of the Fed put—via rate cuts and liquidity support—should boost sentiment into year-end. However, internal Fed divisions and data gaps will likely keep institutional investors cautious. J.P. Morgan warns that gains will be difficult to sustain without confirmation from real-economy data.
8. Conclusion and Investor Recommendations
The December 2025 FOMC meeting is about far more than a 25 bp adjustment. It marks a regime shift from tightening to liquidity maintenance, unfolding in an environment of data opacity and heightened geopolitical/monetary risk.
The Fed is taking a calculated gamble: easing now to pre-empt a downturn based on early warning signals, while hoping inflation does not re-accelerate once official data arrive later in the month.
Key points to monitor in the early-morning statement on 11 December:
QT confirmation: Exact wording on reinvestment into T-bills and the commitment to maintaining “abundant” reserve levels.
Dissent count: The degree of division (e.g., 8–4 or 9–3) will reveal how fragile the current policy consensus really is.
2026 projections: Any upward shift in the 2026 median rate projection will be a warning signal for bond markets.
Powell’s press conference: How he handles questions on missing CPI/labor data and political pressure from the incoming administration.
For investors, this is a time for heightened caution. The easing trend is clear, but volatility stemming from Japan and from the U.S. data vacuum could produce sharp whipsaw moves immediately after the decision.
This report is based on market data and reputable information sources available as of 10 December 2025.