The Fed cuts interest rates by a quarter point. First reactions from the management companies

The Federal Reserve of the United States decided yesterday to lower interest rates by 25 basis points. Here's how experts reacted:

Paolo Zanghieri, Senior Economist at Generali AM, part of Generali Investments

The Fed delivered a widely expected rate cut, despite dissent from both hawks and doves. It maintained its September plan: one cut in 2026 and another in 2027. Growth and inflation forecasts improved, but not unemployment. With mixed data and opposing risks (…), the Fed prefers caution and sees itself well positioned to react to surprises.

It will begin buying Treasury bills to maintain ample reserves—this is a technical decision, not a policy shift. We still expect one final cut next year, possibly later than March. Market expectations for more than two cuts remain too optimistic.

The economy is solid, but employment risks matter more to the FOMC than inflation risks. (…) The projected path for rates is unchanged.

Two notable changes in the statement: unemployment is no longer called “low,” and the Fed now explicitly says rates are trending downward. (…) The FOMC kept its accommodative bias.

Nine of twelve members backed the cut; disagreements reflect different weightings of risks, not different policy directions. No one expects the next move to be a hike.

Powell reiterated optimism on growth—supported by consumption, AI-related investment, and future fiscal easing. The labor market is cooling faster than expected, and revised payrolls may show declines. (…) The Fed expects earlier easing to stabilize unemployment.

Inflation is moderating but still elevated. Tariff-driven goods inflation persists, while services show more disinflation. Inflation should peak in Q1 and fall sharply by late 2026. Risks remain to the upside.

Powell noted the lack of a risk-free policy path but said the Fed can now wait for clearer data. Productivity gains from AI suggest the economy can tolerate higher rates. T-bill purchases (about $40bn initially) aim only to ensure smooth monetary transmission.

We expect one more cut next year, likely mid-year. (…) December’s meeting brought no surprises, and markets reacted positively.

Gordon Shannon, Portfolio Manager at TwentyFour Asset Management (a Vontobel boutique)

This is an aggressive cut, as the FOMC has indicated a higher bar for monetary policy easing in 2026. Investors are lowering their expectations regarding the number of rate cuts the Fed may implement. However, with the highest number of dissenters since 2019, even before the arrival of the new chair, the committee appears fractured

Ray Sharma-Ong, Deputy Global Head of Multi-Asset Bespoke Solutions at Aberdeen Investments

The Fed cut rates by 25 basis points but signaled its intention to keep them above this level, indicating that policy rates are now within the neutral range.

In our view, the Fed is caught between a rock and a hard place, with inflation remaining high despite a weakening labor market. This disconnect has widened divisions within the Committee, where Miran called for a 50-basis-point cut, while Goolsbee and Schmid voted against the reduction.

In the short term, we expect a relief rally in markets as they adjust to the following:

• Markets entered the FOMC meeting concerned about the possibility of a discussion on raising interest rates. Powell’s comment that a hike “was not the base case” removed that risk for the moment.
• Markets will also be relieved by the Fed’s decision to address stress in repo and funding markets through the purchase of USD 40 billion in bills via OMO, which will serve as a temporary short-term liquidity measure.

Beyond this immediate relief, Fed monetary policy is no longer a catalyst for markets:

• The long-term neutral rate remained at 3%. Now that the federal funds rate is between 3.5% and 3.75%, the Committee considers monetary policy to be within the effective neutral range.
• The bar for further cuts is very high, implying that the monetary policy outlook is likely to remain static for some time.

With policy rates on pause, we no longer expect a broad-based beta rebound in equities.

• Market correlations are likely to fall and fundamentals will become more important. Sectors with strong earnings visibility and low sensitivity to macroeconomic volatility will likely outperform.

The artificial intelligence and technology ecosystem continues to stand out as a structural winner, with an investment cycle less dependent on the macroeconomic environment. Large hyperscale companies have indicated multi-year increases in AI capital spending regardless of fluctuations in growth or inflation.

Tiffany Wilding and Allison Boxer, Economists at PIMCO

The Federal Reserve carried out a widely expected 25-basis-point rate cut in December and then signaled a more data-dependent path. Barring an economic shock, another cut is unlikely until the second half of next year.

In the weeks before the October meeting, several officials expressed discomfort with further easing. Two dissented by voting to keep rates unchanged (and one voted for a 50-bp cut). Four participants indicated via the “dot plot” that they would have preferred to pause in December. (…) Powell highlighted downside labor-market risks as the main reason for the cut and stressed that, with rates within “plausible estimates of neutrality,” the Fed can wait for more data. Bond yields fell modestly as Powell avoided signaling that cuts had ended and instead emphasized data dependence.

The federal funds rate in 2026

Our outlook largely aligns with the Fed and market pricing: rates will likely stay between 3.5% and 3.75% for the remainder of Powell’s term (through May) before gradual cuts resume later in the year under new leadership. (…) Stronger-than-expected growth and tax cuts in 2026 may delay inflation's return to 2%, but the Fed remains positioned to ease further if the weakening labor market fails to stabilize. Even if downside risks fade, rate cuts could resume by late 2026 as inflation pressures ease.

December statement and projections

The Fed statement changed little, adopting language that the “extent and timing” of further adjustments will depend on data — similar to wording used after a series of cuts in 2024. (…) New projections showed only modest revisions: stronger expected growth in 2026 (2.3% vs. 1.8%) but little change in unemployment or inflation forecasts, and still only one projected rate cut in 2026. The Fed now sees policy as within the neutral range.

Technical balance-sheet adjustments

The Fed announced technical changes to its balance-sheet and repo operations to address volatility in money-market rates, including Treasury purchases to support liquidity — earlier and larger than many expected. (…) Powell emphasized these were technical adjustments, not a return to quantitative easing programs used in past recessions.