FOMC Preview: Hawkish Cut Looms Amid Fed Divisions, Diminished Easing Path

• The Federal Reserve’s December FOMC meeting comes at a critical moment for the stock market
• Consensus calls for a 25-basis point rate cut.
• Investors will scrutinize the updated dot plot as well as comments from Fed Chair Jerome Powell for hints on further rate cuts and inflation trends.
• For a limited time, get an InvestingPro subscription at the lowest price of the year with our extended Cyber Monday discount.

As the Federal Open Market Committee (FOMC) convenes its final meeting of a tumultuous 2025, all eyes are on Wednesday’s anticipated interest rate decision. With the U.S. economy grappling with a softening labor market, tariff-induced inflation pressures, and delayed government data from a recent shutdown, the Fed faces a delicate balancing act.

Source: Investing.com

Along with the anticipated rate cut, the Fed’s policy update will include freshly minted dot-plot projections, which will provide insights into the committee’s expectations for interest rates, unemployment, and inflation through 2026. Any significant shifts in these projections could lead to recalibrations in market expectations for future monetary policy actions.

What to Expect: Hawkish Cut or Dovish Cut?

Consensus expects a “hawkish cut.” That means the Fed will likely lower its target rate by 25 basis points (to 3.50%-3.75%) but pair the move with tough talk on inflation and a strong signal that further cuts aren’t guaranteed. Five out of 12 FOMC voters have publicly questioned more easing, while three Board members support it—a split that puts Powell in the hot seat for his post-meeting remarks.

Will Powell Signal Another Cut or Pause?

Fed Chair Jerome Powell, whose term expires in May 2026, will hold a 2:30 PM ET press conference to unpack the move, potentially offering clues on the post-Powell era amid speculation of a Trump-nominated successor like Kevin Hassett.

Powell is expected to straddle the line—leaving the door open, but not promising, another cut in January. Recent commentary and market pricing point to just 8 basis points of cuts in January and only one additional move in the first quarter of 2026. Bank of America expects Powell to attempt a “hawkish cut” compromise, and the FOMC statement is likely to acknowledge rising unemployment while making future cuts conditional on further economic weakness.

Markets price just a 23% chance of a January trim, aligning with a potential "long pause" after today’s cut—potentially until March if tariffs stoke inflation.

Dot-Plot Drama: What Will It Show?

The new dot-plot projections will likely show two cuts in 2026, with a policy plateau around 3.0%-3.25%. This suggests the Fed sees rates staying higher for longer, but with some room for easing if inflation cools and unemployment ticks up.

Dissenting dots—potentially 3-4 hawks projecting no 2026 cuts—will amplify divisions, per Goldman Sachs. Any indication of more aggressive cuts—or a signal that the Fed is done—could jolt stocks.

Stock Market Implications: Relief Rally or "Sell the News"?

The December policy decision arrives at a critical moment for the stock market, with the benchmark S&P 500 sitting just 1.2% below its record high from late October.

Source: Investing.com

A “hawkish cut” may disappoint bulls hoping for a pivot, but a dovish surprise could fuel a rally. Small-cap stocks could outperform large-caps as lower interest rates reduce financing costs and improve growth prospects for smaller companies.

If Powell signals a pause, expect volatility as traders recalibrate for fewer cuts in 2026. Value stocks and financial sector companies might outperform as higher rates support profitability prospects.

Crypto mirrors: Bitcoin ($92K) eyes $95K on dovish vibes but a 5-7% pullback on pause talk.

Bottom Line

The FOMC’s decision and Powell’s language will decide whether stocks get a “Santa Claus rally” or a year-end chill. With markets already pricing in easing, the real risk is disappointment—or a surprise signal that the cutting cycle is over before it really begins.

Investors should consider reducing position sizes or hedging exposures ahead of the Fed announcement. Focus should remain on companies with strong fundamentals and defensive characteristics that can perform across various interest rate scenarios rather than making concentrated bets on specific monetary policy outcomes.

***
Below are the key ways an InvestingPro subscription can enhance your stock market investing performance:

• ProPicks AI: AI-managed stock picks every month, with several picks that have already taken off in November and in the long term.
• Warren AI: Investing.com’s AI tool provides real-time market insights, advanced chart analysis, and personalized trading data to help traders make quick, data-driven decisions.
• Fair Value: This feature aggregates 17 institutional-grade valuation models to cut through the noise and show you which stocks are overhyped, undervalued, or fairly priced.

• 1,200+ Financial Metrics at Your Fingertips: From debt ratios and profitability to analyst earnings revisions, you’ll have everything professional investors use to analyze stocks in one clean dashboard.

• Institutional-Grade News & Market Insights: Stay ahead of market moves with exclusive headlines and data-driven analysis.

• A Distraction-Free Research Experience: No pop-ups. No clutter. No ads. Just streamlined tools built for smart decision-making.

Not a Pro member yet?

• App users can subscribe here.
• Web users can subscribe here.

Already an InvestingPro user? Then jump straight to the list of picks here.

Disclosure: This is not financial advice. Always conduct your own research.

At the time of writing, I am long on the S&P 500, and the Nasdaq 100 via the SPDR® S&P 500 ETF, and the Invesco QQQ Trust ETF. I am also long on the Technology Select Sector SPDR ETF. I regularly rebalance my portfolio of individual stocks and ETFs based on ongoing risk assessment of both the macroeconomic environment and companies’ financials.

The views discussed in this article are solely the opinion of the author and should not be taken as investment advice.

Follow Jesse Cohen on X/Twitter @JesseCohenInv for more stock market analysis and insight.