Remember when everyone thought 2026 would finally bring a cascade of rate cuts and the sweet relief of cheaper borrowing? Yeah, about that.
Today the Federal Reserve delivered its third quarter-point cut of 2025, bringing the federal funds rate to a range of 3.5%-3.75%. Markets cheered for about five minutes. Then the latest dot plot dropped like a cold bucket of water: the median forecast for the end of 2026 is still 3.4%. Translation? Just one single rate cut next year, exactly the same signal they sent three months ago.
In a world that’s been conditioned to expect ever-looser policy, that feels almost… rude.
The Dot Plot That Refused to Budge
Let’s be brutally honest – the December dot plot is the financial story of the day. While the statement and press conference offered the usual carefully parsed language, the dot plot is where Fed officials finally show their true colors, anonymously of course.
Out of 19 participants, the median expectation for the policy rate at the end of 2026 sits at 3.4%. That’s a measly 25 basis points below where we stand right now. For 2027 they see another quarter-point move down to 3.1%, and then… nothing. The 2028 median is also 3.1%. In Fed speak, that’s basically saying “this is pretty close to where we think neutral is.”
Perhaps the most interesting aspect is the dispersion. Seven officials – more than a third – actually penciled in zero cuts for 2026. That’s not a rounding error; that’s a bloc that believes the cutting cycle is already more than halfway done.
Three Dissents and a Whole Lot of Skepticism
Today’s meeting wasn’t exactly a love-fest. We saw three official dissents – the most in years.
- Governor Stephen Miran wanted a 50 basis point cut (the hawk turned dove?)
- Kansas City Fed President Jeffrey Schmid preferred no cut at all
- Chicago Fed President Austan Goolsbee also voted to hold steady
On top of that, four non-voting participants apparently disagreed with the decision too. When seven out of nineteen dots show no cuts next year and you have this level of open disagreement, the message is clear: the Fed is deeply divided, and the “higher for longer” crowd still has serious firepower.
Why So Cautious? Inflation Refuses to Die Quietly
Look, I’ve been around long enough to remember when everyone thought inflation was “transitory.” We all know how that turned out. The Fed learned a painful lesson: declare victory too early and you risk a wage-price spiral that’s ten times harder to kill.
Core PCE – the Fed’s preferred gauge – is still running around 2.7-2.8%. Shelter costs remain sticky, services inflation outside of housing is not collapsing, and tariff talk is back on the table after the election. The labor market? Still remarkably resilient. Job openings are high, quits rates elevated, wage growth around 4-4.5%. That’s not an environment screaming for aggressive easing.
“We are strongly committed to returning inflation to 2 percent and will keep policy restrictive until we are confident that goal is being achieved on a sustainable basis.”
– Pretty much every Fed speaker for the last two years
They’re not making it up. The data simply doesn’t let them cut with abandon yet.
What This Means for Markets Right Now
The reaction was swift and ugly. Two-year Treasury yields jumped more than 10 basis points in minutes – the biggest intraday move in months. The 10-year touched 4.35% before settling a bit lower. Mortgage rates? Don’t expect that refi bonanza anytime soon.
Equities sold off hard in the final hour. The “one and done” signal for 2026 removes a major tailwind that many growth and tech names were counting on. Rate-sensitive sectors – real estate, utilities, small caps – got crushed.
In my experience, markets hate two things: surprise and uncertainty. Today they got both.
The Terminal Rate Debate Just Got Real
One of the more subtle but crucial takeaways is the implied terminal rate. With the 2027 and 2028 medians both at 3.1%, the Fed is essentially telling us they think the neutral rate – the level neither stimulating nor restricting growth – is somewhere around 3% or slightly higher.
That’s a big deal. Pre-pandemic, most estimates hovered around 2.5%. If neutral is indeed closer to 3-3.25%, that fundamentally changes valuations across every asset class. Lower forever? Yeah, that narrative just took a body blow.
| Year | Median Fed Funds Projection | Implied Cuts from Current |
| End 2025 | 3.5-3.75% | Current |
| End 2026 | 3.4% | One 25bp cut |
| End 2027 | 3.1% | One more cut |
| End 2028 | 3.1% | No further change |
How Should Investors Position?
First, temper expectations. The era of emergency-level easy money is over, and it’s not coming back unless something truly breaks.
- Lock in longer-term fixed income where it makes sense – CD ladders, certain bond funds, even annuities for retirees
- Focus on quality over speculation in equities
- Real estate investors should probably underwrite at 5.5-6% mortgage rates, not 4%
- Dividend payers with strong balance sheets suddenly look a lot more attractive
- Cash isn’t trash anymore – money market yields above 4% with virtually no duration risk is real competition
Personally, I’ve been rotating clients away from long-duration growth stories and into shorter-duration, higher-quality names for months. Today’s dot plot feels like validation.
The Political Angle Nobody Wants to Talk About
Let’s be adults for a second. We have a new administration coming in that has openly talked about tariffs, immigration restrictions, and fiscal stimulus. All else equal, those are inflationary. The Fed knows this. They’re not going to pre-commit to a aggressive cutting path when the incoming policy mix could very well push price pressures higher again.
Central bank independence is great in theory, but in practice they read the same headlines we do.
Final Thoughts – Patience Is Still the Name of the Game
The Fed isn’t trying to crash the economy. They’re trying to thread the most delicate needle in modern central banking history: cool inflation without triggering a deep recession. So far – knock on wood – they’re pulling it off better than almost anyone predicted two years ago.
One cut in 2026 isn’t the end of the world. It’s actually a sign of confidence that the economy can handle somewhat higher rates without collapsing. The labor market is strong, corporate balance sheets are generally healthy, and consumers still have excess savings (for now).
Markets will throw a tantrum – they always do when the punch bowl gets moved slightly farther away. But tantrums end. Fundamentals eventually win.
In the meantime, keep your powder dry, stay diversified, and remember: the Fed moves slowly for a reason. Today’s dot plot is just another reminder that the road back to normalcy is going to be longer and bumpier than most of us hoped.
But normalcy is coming. And when it arrives, it might actually stick around for a while.
