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 high inflation and moderate economic growth. While the US Dollar saw some decline against major currencies like the Euro and Japanese Yen, the Fed’s statement included plans to begin 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. Different opinions within the Fed committee have sparked predictions of a 25 bps cut. This comes amidst changing 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 shift in concern toward the labor market is the most important signal. 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 inflation, which guides our strategy for the weeks ahead. We must pay close attention to employment data, as it is now the main driver of policy. Jobless claims rose to 230,000 last week, supporting 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 reliance on incoming data means we should expect significant market fluctuations around future employment releases. The latest JOLTS report from October 2025 showed job openings falling to 8.5 million, indicating a loosening labor market. We should consider using options to trade this uncertainty, as a sharp move in the VIX, which is currently around 16, is likely on the next major data print. The Fed is allowing us to look past the current inflation figures. Despite 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. 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.

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