The Fed was "passive" – Analyzing the December FOMC meeting

In-depth analysis of the December 2025 FOMC meeting: A major shift that has been underestimated—From the early termination of QT to the resumption of "non-QE" Treasury bond purchases, it is no longer about "fighting inflation" or "soft landing," but about "preventing a liquidity crisis"

Results:

• The first point was as expected;

• The second point was largely in line with expectations. The dot plot was only slightly adjusted, with the median federal funds rate at the end of 2025 revised down from the previously projected 3.9% to a range of 3.6%–3.8%, while it remained essentially unchanged in 2026, indicating that the committee as a whole still maintains the baseline scenario of "economic rebound in 2026";

• At the dot plot level, the median interest rate at the end of 2025 is revised down by about 25-30bp from September, basically unchanged in 2026, and slightly increased in 2027, with the long-term neutral interest rate remaining at 2.9%. On the surface, this appears to be a "hawkish rate cut." A deeper analysis reveals that the Fed has significantly raised its GDP growth forecasts for 2025 and 2026 (from 1.8% to 2.2% in 2025 and from 2.0% to 2.3% in 2026), lowered its unemployment rate forecast (from 4.3% to 4.1% in 2025), and raised its core PCE forecast by only 10 basis points (from 2.5% to 2.6% in 2025). This indicates that the Fed's baseline scenario still bets on a "soft landing and rebound of the economy after tariff uncertainty subsides." The two dissenters hold completely opposite views: Chicago Fed President Goolsbee (traditional dove) advocates for more aggressive easing. The disagreement between them precisely illustrates that the committee is now divided into three factions: the traditional doves (concerned about employment). leaf="">“Tariff Inflation Cautious Faction” (Schmid, Hammack, etc.)

• Mainstream Centrist Faction (Beting on an Economic Rebound in 2026, Unwilling to Ease Too Quickly)

This division has rendered the dot plot meaningless—it is neither a victory for doves nor an advantage for hawks, but rather a compromise product of “each saying their own thing”. V. The Huge Discrepancy Between Market Pricing and Reality As of the December 10th meeting: The January 2026 contract still only prices in a rate cut of about 15bp, with a cumulative cut of about 35bp in March, and only 90–95bp for the whole year; The market still expects the Fed to "pause" no earlier than the second quarter of 2026. However, considering the fact that the Federal Reserve has been forced to shift course twice, the market has clearly underestimated the future easing slope. Historical experience shows that once the Federal Reserve is forced to restart QE-like asset purchases, it will almost certainly be followed by a larger rate cut (a 75bp rate cut within three months after the start of non-QE in September 2019; a direct cut to zero in March 2020). Conclusion: Monetary policy has re-entered a "liquidity-driven" mode. The greatest significance of the December 2025 FOMC meeting lies not in the 25bp rate cut, but in the fact that the Federal Reserve was forced to abandon its 180-degree turn twice in a very short period of time—from "long-term QT ​​+ gradual rate cuts" to "immediately stopping QT + restarting Treasury bond purchases." This indicates that: The banking system's liquidity has genuinely reached a critical point, and the Federal Reserve can no longer remain defiant; the monetary policy transmission mechanism has shifted from an "interest rate channel" back to a "quantity/liquidity channel"; and future easing paths will be determined more by wholesale funding market conditions than by CPI or employment sub-items. In short: The Federal Reserve today clearly announced that the main theme of monetary policy in 2025–2026 will no longer be "fighting inflation" or "soft landing," but rather "preventing a liquidity crisis." All subsequent macroeconomic narratives must be reconstructed around this new theme.