Why Has the Dollar’s Reaction to December’s Rate Cut been so Muted?

Heading into December’s Federal Reserve meeting, markets were already convinced that a third straight interest rate cut was on the way. That confidence held despite clear divisions among Fed officials at the previous meeting, and despite the fact that policymakers were effectively flying blind after weeks of missing data due to the longest government shutdown in US history.

The Fed did deliver the expected cut, but the more interesting story lies in what comes next. Updated economic projections and Chair Jerome Powell’s press conference both made one thing clear: the path forward is anything but settled.

A Cut Aimed at Insurance, Not Acceleration

This latest move looks very much like another “insurance cut” - a small buffer against a slowing labour market rather than the start of a deeper easing cycle. Even without official jobs data, private- sector indicators have shown hiring weakening and layoffs rising. That puts clear pressure on one side of the Fed’s mandate: supporting employment.

Yet the Fed’s internal split suggests that officials are not seeing the labour market as the only issue. Three policymakers dissented in this month’s vote - two thought rates should stay put, and one argued for an even bigger 50bp cut. That rare two-sided disagreement shows a committee wrestling with competing risks: softer job growth on one hand, and stubborn inflation on the other.

Why FX Markets Will Focus on the Projections

For the dollar, the most important development was the Fed’s updated Summary of Economic Projections. Crucially, most officials still see no more than one additional rate cut in 2026. That’s fewer cuts than markets had pencilled in, especially given the softening economic tone of recent months. The implication is that the Fed is leaning back toward caution on inflation, even after three consecutive cuts. The prospect of fewer cuts, or of higher-for-longer rates, should help keep the dollar on relatively firmer footing despite this latest round of policy loosening.

Powell reinforced this message by stressing that after the latest cut the Fed is now “well positioned to wait and see how the economy evolves” as delayed data begins to flow again. With a backlog of key reports arriving before the next meeting at the end of January, markets may react more sharply than usual to upcoming releases like non-farm payrolls and inflation.

The Economy’s Puzzling Mix of Growth and Weak Jobs

Powell also pointed to a surprising disconnect in the economy: growth has held up better than expected, but job creation has not. He noted that new technologies, including AI, may be playing a role by helping firms expand without hiring as many workers. This adds another layer of uncertainty to how the Fed interprets the incoming data stream, and the reaction of the dollar to any new economic news.

Looking Ahead: Policy Still Shaped by Uncertainty

Looking further ahead, markets are also keeping an eye on the political backdrop shaping the Fed’s future leadership. With Chair Powell’s term ending in May 2026, investors widely expect President Trump to nominate a successor who aligns more closely with his preference for lower interest rates. A change at the top could influence how the Fed interprets incoming economic data and how willing it is to ease policy. However, any shift in tone from a new chair would still have to work through a committee that has become increasingly divided in its views. As recent dissenting votes have shown, the Fed is no longer operating with automatic consensus, so a decisive pivot toward rapid rate cuts in mid-2026 is still far from guaranteed.

For now, the Fed’s collective bias has skewed toward managing inflation risks amid the continuing distortion from tariffs and the mixed signals from the labour market - limiting the scope for rapid rate reductions, and helping to anchor the US dollar.