The Federal Reserve has decided to reduce the Federal Funds Target Range to 3.50%–3.75% after its December meeting. This decision follows a gradual cooling in the labour market and reflects the challenges posed by high inflation. Fed Chair Jerome Powell highlighted broad support for this decision during his press conference, mentioning that the economy does not currently feel ‘hot’.
The Federal Open Market Committee (FOMC) signalled a pause in rate cuts, with concerns about elevated inflation and moderate economic growth. While the US Dollar saw some decline, dipping against major currencies like the Euro and Japanese Yen, the Fed’s statement included plans to begin reserves-management purchases of treasury bills.
Summary of Economic Projections
The Fed’s Summary of Economic Projections detailed various policy outlooks, anticipating a 3.6% federal funds rate by the end of 2025. A 25 basis points rate reduction is expected in both 2026 and 2027, with unemployment forecasted to reach 4.4% by 2026. These projections show differences in views for appropriate rate paths in future years, influencing USD behaviour against other currencies.
Market participants are focused on the Fed’s December interest rate announcement. Divergent opinions within the Fed committee have sparked predictions of a 25 bps cut. This comes amidst evolving growth and inflation projections, keeping attention on Chair Powell’s guidance, especially concerning inflation and labour market discussions.
The Federal Reserve’s decision to cut rates was expected, but the clear pivot in concern toward the labor market is the most important signal for us. While the official statement now includes the phrase “extent and timing” to suggest a pause, the press conference tells a different story. The Fed is now more worried about rising unemployment than it is about inflation, which guides our strategy for the weeks ahead.
We must pay extremely close attention to employment data, as it is now the primary driver of policy. We saw jobless claims tick up to 230,000 just last week, which supports the Fed’s view of a cooling market. The November 2025 payroll report showed a gain of only 150,000 jobs with downward revisions to prior months, validating Powell’s comment that job growth has been overstated.
Market Volatility and Employment Data
This heavy reliance on incoming data means we should anticipate significant market volatility around future employment releases. With the latest JOLTS report from October 2025 showing job openings falling to 8.5 million, the evidence of a loosening labor market is building. We should consider using options to trade this uncertainty, as a sharp move in the VIX, which is currently hovering around 16, is likely on the next major data print.
The Fed is essentially giving us permission to look past the current inflation figures. Even with the last Core CPI reading from November 2025 showing a 3.8% annual rate, Powell made it clear that tariffs are distorting the picture and the underlying trend is manageable. If the choice is between a weak labor market and inflation slightly above 2%, the Fed will choose to support jobs.
This environment is bearish for the US Dollar, as we have already seen with the DXY index breaking below 99.00. A central bank focused on employment risks over inflation will keep downward pressure on its currency. We should look at buying call options on currency pairs like EUR/USD and AUD/USD to position for further dollar weakness with defined risk.
The decline in Treasury yields indicates that the bond market is pricing in this dovish stance. We can use interest rate futures to bet that the Fed may have to cut rates more aggressively in 2026 than the current projections imply. The main risk to this view would be a sudden reversal in the employment data, but for now, the path of least resistance is to position for lower rates.
