Investors cheer third Fed cut but quietly price in more easing than policymakers project
Wall Street is daring the Federal Reserve to cut more than it says it will.
US stocks rallied and bond yields fell after the Fed delivered its third straight quarter‑point rate cut, even as a divided central bank signalled only limited easing ahead, according to CNBC.
The Federal Open Market Committee lowered the federal funds rate to a 3.50 percent–3.75 percent range, taking total cuts to 75 basis points since September and 175 basis points since last September, as per Reuters.
Equities responded immediately.
The Dow Jones Industrial Average jumped 497.46 points, or about 1.1 percent, to 48,057.75, while the S&P 500 rose 0.7 percent to 6,886.68 and briefly traded above its record close of 6,890.89.
The Nasdaq Composite added 0.3 percent to finish at 23,654.16, according to CNBC.
MSCI’s global equity gauge also climbed, and the pan‑European STOXX 600 ended slightly higher, Reuters reported.
Rate expectations, however, are pulling apart.
New Fed projections show a median outlook for just one more quarter‑point cut next year, matching September’s forecast, and only one additional cut in 2027 as inflation moves closer to the 2 percent target.
Yet futures markets are still pricing in two more cuts next year and two in 2026, and one CME FedWatch reading showed a more than 77 percent chance of two additional cuts next year, according to CNBC.
The Fed also projects inflation slowing to about 2.4 percent by the end of next year, with growth accelerating to 2.3 percent and unemployment steady at 4.4 percent, Reuters reported.
The meeting underscored how split policymakers have become.
Reuters said the decision to cut by 25 basis points drew three dissents: Chicago Fed President Austan Goolsbee and Kansas City Fed President Jeffrey Schmid wanted no change, while Fed Governor Stephen Miran again argued for a larger half‑point reduction.
The Fed’s “dot plot” showed six policymakers pencilling in no cut at this meeting, keeping their rate view at 3.9 percent.
One strategist described the move as a “hawkish cut,” with the statement language tweaked to signal a likely pause even as markets lean toward further easing.
In his press conference, US Fed Chair Jerome Powell stressed that officials are “well positioned to wait to see how the economy evolves,” noting the policy rate now sits within a broad range of estimates of its neutral value.
Powell also said the Fed would “wait and see” before deciding on its next move and “virtually ruled out” a rate hike next, saying, “I don’t think that a rate hike ... is anybody’s base case at this point,” according to CNBC.
He repeatedly flagged downside risks in the US labour market and said the central bank does not want policy to push down on job creation, as per Reuters.
The Fed’s communication also marked a shift in how it frames the labour backdrop.
The statement dropped a reference to the jobless rate as “low,” instead noting that job gains have slowed and unemployment has “edged up through September.”
Policymakers had to rely on “available indicators” such as internal surveys and private data because a 43‑day US government shutdown delayed official releases.
The most recent figures show unemployment at 4.4 percent and core inflation at 2.8 percent, with price pressures partly attributed to the pass‑through of higher import taxes.
Balance sheet policy added another support for risk assets.
The Fed will start buying short‑term bonds and slowly expand its balance sheet, pushing short‑term US Treasury yields lower, according to CNBC.
In the bond market, the 10‑year US Treasury yield fell about 4.3 basis points to 4.143 percent after touching a three‑month high of 4.209 percent, putting it on track to snap a four‑session streak of gains, Reuters said.
The US dollar weakened after the decision and Powell’s comments that the next move is unlikely to be a hike.
The greenback fell 0.8 percent against the Swiss franc to 0.8000 franc and slipped 0.6 percent to 155.92 against the Japanese yen, while the euro rose 0.6 percent to US$1.1691 and the US dollar index declined 0.6 percent to 98.66.
Gold prices reversed earlier losses to climb, and spot silver hit a record US$61.85, up 113 percent so far this year.
In energy markets, Brent crude settled at US$62.21 a barrel and US West Texas Intermediate closed at US$58.46 after officials said the US seized an oil tanker off Venezuela.
Seasonality may amplify the policy effect on risk assets.
December tends to be weaker for the S&P 500 overall, but the final two weeks often produce a so‑called Santa rally as investors square books into year‑end.
One economist said “the last interest rate decision of 2025 has essentially paved the way for a Santa Claus rally to end the year and the S&P 500 is poised to exceed the 7,000 milestone in the next few weeks,” according to CNBC.
