The US Federal Reserve's December rate cut of 25 basis points marked an important moment in monetary policy, but Chair Jerome Powell made it clear that this is not the beginning of an aggressive easing cycle. The Fed is navigating what he described as a “carefully calibrated” phase of policy adjustment, with the central bank signalling that only one further cut is expected in 2026 and a further one in 2027.
This cautious stance is down to the challenges still facing the US economic outlook, with slowing inflation that is still above the target rate, a softening labour market and uncertainty surrounding the broader global environment. Powell re-emphasised this balanced approach, saying that the Fed “will do what is necessary to maintain price stability while supporting a sustainable expansion.”
The labour market is showing clear signs of moderation. Job creation has slowed, which Powell recognised as partly being down to AI. Wage pressures have eased and upcoming employment figures are expected to be distorted due to incomplete data during the US government shutdown. Policymakers anticipate these adjustments will make the labour picture look worse before it stabilises. Powell acknowledged the shift, stating that “the labour market has come into better balance, though cooling may continue.”
The larger story is a potential K-shaped economic path, where high-productivity sectors continue to thrive while lower-skill and labour-intensive industries face greater pressure.
The Fed maintains that meaningful progress has been made this year against non-tariff related inflation. Without further tariffs or external price shocks, inflation is expected to peak in the first quarter before edging lower throughout the year. But risks remain, especially within services and housing, where price stickiness remains a challenge. Powell reiterated the Fed’s commitment to flexibility, noting that policymakers are “not on a preset course” and will react decisively if economic data suggests they must do so.
Another thing to consider for future policy, is the leadership transition now taking place. With a new chair expected to be appointed, markets are dealing with a period of elevated uncertainty. The new chair’s policy leanings, communication style and appetite for risk management will shape expectations for years to come. Powell addressed the transition indirectly, emphasising that “continuity and credibility are essential to the Federal Reserve’s mission.”
Investors will be watching closely to see whether the new leadership aligns with Powell’s approach or adopts a more assertive stance in the face of shifting economic conditions and political pressures from the Trump administration.
The Fed is aware that the neutral rate may be rising, which could limit the extent of future easing. At the same time, global financial conditions remain sensitive to US monetary policy, meaning caution is essential to avoid wider unintended consequences.
Ultimately, the path ahead for the Fed is still uncertain, but also provides opportunity. With inflation moderating and labour cooling in a controlled manner, the FED has room to manage the next phase of policy with patience. Yet the leadership transition, softening economic momentum and the possibility of a K-shaped adjustment means they are still facing challenging and finely balanced future policy decisions.
The central bank’s strategy will continue to be guided by data, but also by the need to preserve credibility at a crucial moment for the economy. As Powell commented, “Our job is to navigate the risks, not to assume them away.” In the months ahead, that navigation will shape both the US economy and global financial conditions.
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