Wall Street Analysts: The Fed's decision turned out to be more moderate than expected

Contrary to the market’s initial expectations, which anticipated a more restrictive approach, the Fed demonstrated political restraint in its latest decision. Although the 25 basis point interest rate cut was implemented as forecasted, surrounding signals indicated a cautious rather than hawkish stance by the central bank.

Subtle signals of moderation in the Fed’s statement

A key moment was the decision to resume the $40 billion Treasury bond purchase program – the first such step since 2020 directly noted in the policy statement. This move was interpreted by experts as a clear dovish signal.

Another important observation concerns dissenting votes within the FOMC. While six members favored keeping rates steady next year, only two voting members expressed opposition – a figure significantly below market expectations of a hawkish stance. This relatively low number of vetoes suggests a lack of strong support for a more restrictive course.

Widespread among analysts’ belief in a moderate approach

Anna Wong from Bloomberg assesses that despite some restrictive undertones, the overall tone of policy remains moderate. The committee significantly raises its economic growth forecast while lowering inflation outlooks. Wong expects that within a year, the Fed will decide on a total cut of 100 basis points instead of the 25 basis points forecasted in the dot plot – citing anticipated weakening in wage growth dynamics and the lack of inflation rebound signals in the first half of 2026.

David Mericle from Goldman Sachs admits that the decision contains various restrictive elements, but overall remains consistent with previous expectations. He notes that six members expressed reservations in the dot plot – a higher number than previously estimated. At the same time, he points out that resuming asset purchases to stabilize the balance sheet, directly included in the statement, is an extraordinary step.

Labor market forecast indicates slowdown

Mike Cahill, a currency analyst at Goldman Sachs, points to employment parameters. The committee maintained its unemployment rate forecast at 4.5% at the end of Q4, indicating a clear slowdown in employment growth. With the current unemployment rate at 4.44%, reaching the median requires an increase of less than 5 basis points per month. Seven FOMC members foresee the rate moving toward 4.6%-4.7%, which better reflects recent average values.

Concerns about the bond purchase program

The Fed’s reserve management strategy raises discussion. Ira Jersey from Bloomberg highlights a potential dilemma: the reserve balance is either sufficient or insufficient. If the Fed wants to maintain proper reserve supply, it should resort to temporary open market operations during periods of decreasing balance, rather than fixed-term operations. Jersey argues that traditional repo transactions better calibrate reserve demand and are a more efficient method.

Policy uncertainty amid personnel and institutional changes

Upcoming changes in Federal Reserve leadership add an extra layer of uncertainty. Jim Bianco from Bianco Research emphasizes that the emergence of a new Fed chair poses a serious challenge. Initially, he expected more dissenting votes signaling the committee’s ability to balance political pressures. However, if such votes only appear after the new chair takes office, they may be perceived as politically motivated.

Seema Shah from Principal Asset Management suggests that due to the lack of recent economic data and disagreements over the neutral interest rate level, full consensus within the FOMC is unlikely. She predicts that the Fed will adopt a wait-and-see stance and monitor the delayed effects of previous hikes. While 2026 may bring some additional easing, its scale will be minimal and dependent on confirming the economy’s health.

Investor outlook

Richard Flynn from Charles Schwab UK interprets the Fed’s earlier actions as a warning of rising downside risks amid the global slowdown. For investors, this represents a gentle correction rather than a dramatic shift in approach. Although the rate cut may provide short-term support for risk assets and potentially trigger a seasonal rally, volatility could remain elevated as the market digests implications for future Fed policy and broader economic prospects.