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Fed divided on rate cuts - Are rate cut expectations heating up?
Cato_KT
joined discussion · Dec 31, 2025 14:50
Based on the minutes of the Federal Reserve's December meeting in the early morning, most members believe that after the December rate cut, high interest rates should be maintained for a period of time. However, if future inflation falls as expected, further rate cuts are possible.
This meeting record reinforces the expectation of no rate cuts in the first half of 2026, especially in the first quarter. At the same time, it is expected that inflationary pressures in the U.S. will significantly increase in the first quarter. Therefore, the most optimistic expectation for a rate cut would be pushed to June 2026.
It’s important to note that inflation from January to March 2026 needs close attention. If inflation rises due to tariff pass-through effects, a natural decline would have to wait until Q2.
If employment data remains stable, the Federal Reserve's interest rate cuts will be determined by inflation. In that case, we can expect to see inflation naturally ease by the end of Q2, with actual rate cut actions likely occurring in early Q3.
Of course, if inflation in the first quarter of 2026 does not increase due to tariff transmission but merely stays sticky, expectations for a rate cut could be brought forward to the middle of Q2.
This is based on current expectations, but if the new Federal Reserve chair is confirmed in January, this could alter all existing forecasts. However, if inflation accelerates, even the new Fed Chair would struggle to convince other board members to cut rates amidst high inflation.
The new Federal Reserve Chair, whether nominated or officially in office, must have a favorable inflation environment as a prerequisite to persuading FOMC members to push for rate cuts.
Based on the minutes of the Federal Reserve's December meeting in the early morning, most members believe that after the December rate cut, high interest rates should be maintained for a period of time. However, if future inflation falls as expected, further rate cuts are possible. This meeting record reinforces the expectation of no rate cuts in the first half of 2026, especially in the first quarter. At the same time, it is expected that inflationary pressures in the U.S. will significantly increase in the first quarter. Therefore, the most optimistic expectation for a rate cut would be pushed to June 2026. It’s important to note that inflation from January to March 2026 needs close attention. If inflation rises due to tariff pass-through effects, a natural decline would have to wait until Q2. If employment data remains stable, and the Fed's rate cuts are determined by inflation, we can see that a natural decline in inflation won’t occur until the end of Q2, while an actual rate cut may not happen until the beginning of Q3. Of course, if inflation in the first quarter of 2026 does not rise due to tariff transmission but only remains sticky, expectations for a rate cut could be brought forward to the middle of the second quarter. This is based on current expectations. However, if the new Federal Reserve Chair is confirmed in January, this will change all existing expectations. But if inflation accelerates, even the new Fed Chair would struggle to convince other board members to make a rate cut decision amidst high inflation. The new Federal Reserve Chair, whether nominated or officially appointed, must have a favorable inflation environment to persuade FOMC members to push for rate cuts.
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