Fed likely moving to a hold after its December cut as FOMC is split

Highlights: The Fed delivered a 25bps rate cut as expected, lowering the target range to 3.50–3.75 per cent. It also introduced reserve-management purchases of short-term instruments, which was seen as a dovish signal. That said, the ‘DOTS’ chart with Fed members’ views of the future rate path was little changed, with continued wide dispersion in views. With 3 voting members preferring no cut and Chair Powel saying policy is now within a broad range of plausible neutral estimates, we think the Fed will now hold rates at the current level. Bonds may see support for short maturities but trade in a range for longer dated bonds, while USD weakened a bit on the dovish market interpretation of the meeting. Risk assets should be supported; Mr Powell shares our view that growth is helped by fiscal support and AI, and that labour market weakness is at least in part a supply rather than solely a demand issue.

• The Fed reserve-management purchases will begin with roughly USD40 billion in Treasury bills but they are not QE (Quantitative Easing) and carry no implications for the policy stance
• The economic projections show stronger growth and lower inflation, with a notable mechanical rebound in 2026 GDP following the shutdown. Despite these upgrades, the median rate path was unchanged, while the dot dispersion widened significantly. The data-dependent Fed may lead markets to also see continued volatility around data releases
• We continue to expect the policy rate to remain unchanged through 2026–27, with meaningful two-sided risks as the economy transitions into 2026
• The policy rate cut is accretive to corporate earnings and should help keep valuations in check. Technology, AI, and productivity-linked sectors stand to benefit from lower real yields and improving macro conditions. The cut is also positive for rate-sensitive sectors and companies benefiting from AI-driven investment and the ongoing US re-industrialisation trend. Even if the Fed does not cut any further and P/E multiples stagnate, equities can do well as the underlying economy remains robust with corporate earnings projected to grow by roughly 14.5 per cent in 2026. For fixed income, the Fed’s monitoring of inflation and the continued decline in inflation expectations provide a supportive backdrop