FOMC December 2026: Fed cuts 25bp to 4.00–4.25% — statement decoded

The Fed is cutting because the policy rate, at 4.25%, remains significantly above the estimated neutral rate of 3.00%. Even with inflation above 2%, the Fed can reduce the degree of restriction — cutting rates — while still being restrictive. Maintaining 4.25% once inflation is clearly falling would eventually over-tighten, causing unnecessary unemployment. The December cut is consistent with a "gradual normalisation" path, not a pivot to easy policy.

The dot plot (formally, the Summary of Economic Projections) shows each FOMC participant's anonymous forecast for the appropriate federal funds rate at year-end for the next three years and the longer run. The median dot is the conventional summary. However, dots are not commitments — they can and do shift significantly meeting to meeting as economic conditions evolve. The December 2026 median dot of 3.75% for end-2027 means the median participant expects one more 25bp cut at some point in 2027.

Fed cuts do not automatically lower mortgage rates. 30-year fixed mortgage rates track the 10-year Treasury yield, not the fed funds rate. If the 10-year Treasury rises because markets expect higher inflation or fewer future cuts, mortgage rates can rise even as the Fed cuts short-term rates. This happened in late 2024: the Fed cut 100bp and 30-year mortgage rates rose 40bp. The December 2026 cut similarly pushed long-term yields slightly higher due to the hawkish dot plot.