Markets Brace for a ‘Hawkish Cut’: Navigating the Fed's Next Move

The global capital markets are currently positioned on a knife-edge as investors await the Federal Reserve’s decision this Wednesday. Following a period of significant indecision regarding the direction of US monetary policy, the consensus has coalesced around a third consecutive interest rate reduction. If realised, this quarter-percentage-point move would lower the Fed’s benchmark rate to a target range of 3.5%–3.75%.

However, market participants should not mistake this potential easing for a guarantee of unlimited liquidity. The prevailing narrative suggests a "hawkish cut"—a scenario where the central bank lowers rates but simultaneously signals that the easing cycle may be pausing. As Bill English, a former director of monetary affairs at the Fed, notes, "The likeliest outcome is a kind of hawkish cut where they cut, but the statement and the press conference suggesting that they may be done cutting for now."

The Federal Open Market Committee (FOMC) appears to be fracturing into two distinct camps, reflecting the complex economic reality of late 2025. One faction advocates for continued cuts to safeguard the labour market, which has shown signs of fragility. Recent data indicates that whilst job openings have remained relatively stable, actual hiring has decreased significantly, and layoffs are ticking upward.

Conversely, the opposing faction argues that easing has perhaps gone too far, threatening to entrench inflation. The Fed’s preferred inflation gauge stood at an annual rate of 2.8% in September, lower than some Wall Street forecasts but still stubbornly above the central bank’s 2% mandate. Former Cleveland President Loretta Mester highlighted this tension, stating, "Inflation is not back to 2% so they’re going to need to keep policy somewhat restrictive... Right now, inflation is pretty well above the goal, and it’s not just all tariffs driven."

Beyond the headline rate decision, astute investors will be scrutinising the "dot plot," a chart updating the interest rate projections of individual Fed officials. Given the split within the committee, this anonymous outlook is expected to show a high degree of divergence. Goldman Sachs anticipates that the post-meeting statement may be tweaked to indicate that "the bar for any further cuts will be somewhat higher," harking back to language used a year prior regarding policy adjustments.

Furthermore, the mechanics of the Fed’s balance sheet are back in focus. In October, policymakers signalled a halt to "quantitative tightening" - the process of allowing maturing bonds to roll off the balance sheet. With pressures mounting in overnight funding markets, there is speculation that the committee may pivot back to purchasing bonds. Whilst this would likely not reach the scale of "quantitative easing," it represents a significant shift in liquidity management that could impact yield curves and equity valuations globally.

The backdrop to this monetary policy decision is complicated by the political landscape, specifically the tariffs implemented under President Donald Trump. While the administration argues inflation has stabilised, the gap between current price levels and the Fed’s target remains a point of friction.

Ultimately, Wednesday’s meeting is less about the immediate rate cut and more about the trajectory for 2026. As Mester observes, "I do hope that they signal that they think the economy has gotten to a place where policy is in a good place and they are going to slow down the cuts." For global investors, the message is clear: the era of automatic easing may be drawing to a close, replaced by a data-dependent, cautious approach that prioritises inflation control over immediate stimulus.