The December FOMC meeting delivered a 25bps rate cut, aligning with market expectations. However, the dot plot and press conference revealed a more dovish tilt than anticipated. This dovishness manifested in three key aspects: 1. **Dot Plot Surprise**: The feared "hawkish dot plot" (e.g., no cuts in 2026) did not materialize. Instead, the Fed upgraded 2026–2027 GDP growth forecasts, lowered inflation projections, and maintained the expectation of one rate cut per year—painting a "Goldilocks" scenario (strong growth, subdued inflation, and gradual easing). 2. **Press Conference Tone**: Chair Powell echoed his August Jackson Hole remarks, emphasizing downside risks to the labor market while downplaying inflation concerns. He repeatedly cited weakening employment data, noting potential overestimations in official figures. 3. **Technical Balance Sheet Expansion (RMP)**: Starting December 12, the Fed will initiate $40B/month in Treasury purchases, slightly exceeding expectations in both timing and scale.

**Key Takeaways from the FOMC Decision** 1. **Rationale for the 25bps Cut**: Powell cited softening labor markets and inflation’s "expected decline" as justification for acting now rather than waiting until January. However, dissent grew, with three voters opposing (Miran favoring 50bps, Schmid and Goolsbee advocating no cut). Four others signaled "soft dissent" via the dot plot (projecting only two 2025 cuts but not voting against). 2. **Future Rate Path**: The statement hinted at a pause in early 2025, revising language to mirror December 2023’s "wait-and-see" stance. Yet, the dot plot retained one cut annually through 2027, alleviating fears of a hawkish shift amid upbeat GDP and commodity price trends. 3. **Dot Plot Signals**: - Unchanged rate path for 2026–2027 (one cut/year). - 2026 GDP forecast raised 0.5pp to 2.3%, reflecting productivity and consumption optimism. - 2026 PCE and core PCE inflation trimmed by 0.2pp and 0.1pp to 2.4% and 2.5%, respectively, with unemployment steady. 4. **Dovish Press Conference Highlights**: - Powell ruled out hikes as the "next step." - Labor market concerns dominated: He flagged negative job growth (after adjusting for overestimates) and nonlinear deterioration risks. - Inflation risks were downplayed, with tariffs framed as one-off and services inflation deemed manageable. 5. **RMP Details**: Unlike QE, this $40B/month program aims to match reserve growth with banking system needs. The accelerated pace (likely stabilizing at $20B–25B/month) addresses: - Liquidity strains since October (elevated SRF usage and SOFR-ONRRP spreads). - Proactive cushioning for April 2025 tax-season TGA surges.

**Press Conference Excerpts** - **On Neutrality**: Powell affirmed policy is now "within neutral range," allowing flexibility to respond to data. - **Labor Market**: He stressed employment metrics are weaker than reported, with real-time estimates suggesting negative payrolls. - **Inflation Dynamics**: Tariff-driven goods inflation (over half the overshoot) should peak by Q1 2025, while services inflation cools. - **Dissents**: Powell framed disagreements as balanced risk assessments, not dysfunction. - **1990s Parallels**: Rejecting comparisons, he noted unique dual-mandate tensions today. - **Productivity Boost**: AI and structural gains may sustain higher GDP growth without stoking unemployment.

**Closing Notes**: Powell reiterated the Fed’s 2% inflation commitment but underscored labor market fragility. The RMP’s design (including 1–3 year coupon purchases) further supports short-end stability. With three meetings left in his term, Powell aims to hand over an economy on solid footing—controlled inflation and robust employment.