Minutes FOMC: Further cuts are possible if inflation eases. EURUSD limits decline

Key Takeaways and Market Commentary

• Rate Adjustment: The Federal Reserve reduced the target range for the federal funds rate by 25 basis points to 3.50–3.75%.

• 9–3 Vote Split: The decision was reached amid a notable lack of unanimity. Two members advocated for a pause (maintaining current rates), while one member (Stephen Miran) called for a more aggressive 50 basis point cut.

• Balance of Risks: The Committee officially declared a shift in the balance of risks toward employment, emphasizing that the downside risks to the labour market remain elevated.

• PCE Metrics: Both headline and core PCE inflation held steady at 2.8% y/y. While the Fed characterized these levels as “somewhat elevated,” it attributed the primary contribution to goods inflation to the impact of trade tariffs.

• Risk Evolution: Although inflationary risks are still viewed as slightly tilted to the upside, several participants noted that these pressures are gradually beginning to fade.

• Labour Market Softening: The minutes highlighted a progressive cooling of the sector, characterized by rising unemployment, slowing payroll momentum, and weak corporate hiring plans. Specific concern was raised regarding the heightened pressure on low-income households.

• Rate Trajectory: A majority of FOMC members favour continued, gradual rate reductions, provided disinflation aligns with projections. However, voices calling for a pause in the cycle following this cut have emerged.

• Data Dependency: The Committee unanimously stressed that policy is not on a “preset path.” Future adjustments remain strictly data-dependent as the Fed moves toward a more neutral stance.

• Productivity and AI: The 2026 Summary of Economic Projections (SEP) assumes moderate growth supported by investments in Artificial Intelligence, which may bolster productivity without a proportional increase in headcount.

Market Commentary and Interpretation

The Federal Reserve has taken a decisive step toward dovish risk management. The central bank is de facto accepting a period of above-target inflation to forestall a sharper deterioration in the labour market. Crucially, the implementation of Reserve Management Purchases (RMP)—the direct buying of short-term bills to bolster reserves—alongside the modification of the Standing Repo Facility (SRF), represents a technical easing of liquidity. Despite the Fed’s messaging, markets are interpreting these measures as a form of “mini-QE” on the front end of the curve.

While these minutes do not fundamentally alter the current market narrative, they suggest that the hawkish faction within the FOMC is unlikely to seize dominance in 2026. Although the US dollar is currently firming and the S&P 500 (US500) has yet to stage a meaningful rebound, the substance of the minutes points toward a more dovish influence on market sentiment in the coming days.

If upcoming labour market data confirms the necessity for further easing, equity indices are likely to extend their gains and the dollar may soften. However, should the data fail to show such weakness, the market could rapidly recalibrate expectations toward a single remaining rate cut or a prolonged period of unchanged policy.

EURUSD limits its decline slitghly after release of the minutes from the december meeting. Source: xStation5