A Quietly Bullish Fed Move Is Fueling the Year-End Rally Just as Critics Expected Turbulence

The Federal Reserve delivered exactly what markets were positioned for on Wednesday: a 25-basis-point rate cut, bringing the benchmark policy range down to 3.50%–3.75%. But while the rate move itself was fully priced in, the broader message from the Fed turned out to be more supportive for risk assets than many had feared. The updated Summary of Economic Projections, the dot plot, and—most importantly—the introduction of renewed Treasury bill purchases all leaned toward an easing of financial conditions rather than a tightening of expectations. The result was an immediate pop in equity markets and a clear signal that the Fed is in no rush to undercut the year-end rally.

At the policy level, the Committee reaffirmed that the economy continues to expand at a “moderate pace,” while acknowledging that job gains have slowed and the unemployment rate has edged higher. Inflation, in familiar Fed fashion, is still described as “somewhat elevated,” and uncertainty around the outlook remains “elevated” as well. What stood out, however, was that none of this language escalated into something more cautionary. The Fed remains attentive to “both sides” of its dual mandate and continues to judge that downside risks to employment have risen—but critically, without suggesting that a hard landing is forming.

From a market perspective, the most important shift in the statement was subtle but meaningful. In October, the Fed said it would consider “additional adjustments” to the policy rate. In December, that language evolved into “the extent and timing of additional adjustments.” That change matters. It signals that further easing is no longer a question of if, but rather how much and when. That framing helps reinforce the idea that the Fed is now moving along a controlled normalization path toward neutral, not toggling between tightening and loosening based on short-term data volatility.

The dot plot and SEP reinforced that message. The median path for the federal funds rate was unchanged across every forward year: 3.6% at the end of 2025, 3.4% at the end of 2026, 3.1% in 2027 and 2028, with a longer-run neutral estimate still pinned at 3.0%. That stability alone was a relief to markets that had grown nervous about a hawkish repricing. Even more constructive was what happened beneath the surface. For both 2026 and 2027, the distribution of dots shifted lower compared to September, with fewer policymakers projecting “higher-for-longer” outcomes and more clustering around the low-3% neutral zone. In plain English: the Fed is growing more confident that it can reach neutral without reigniting inflation.

The macro forecasts quietly reinforced that confidence. Real GDP growth for 2026 was revised sharply higher to 2.3% from 1.8%, while 2025 and 2027 both saw modest upgrades as well. Unemployment projections were stable to slightly lower in the later years, and inflation forecasts moved meaningfully lower—especially for 2025 and 2026. Headline PCE for 2026 dropped to 2.4% from 2.6%, and core PCE moved down to 2.5% from 2.6%. That combination—better growth and faster disinflation—is the clearest version of a “Goldilocks” setup the Fed has projected in years.

Yet, in a move that underscores its late-cycle caution, the Fed refused to validate a faster easing cycle. Despite better growth and softer inflation projections, the policy path did not accelerate. That sends a subtle signal: the Fed is comfortable with the macro trajectory but remains sensitive to inflation risks and does not want to stimulate too aggressively into a still-tight labor market.

The most market-moving development, however, had nothing to do with rates at all. The Fed announced that it will initiate reserve-management purchases of Treasury bills beginning December 12, with the first round totaling roughly $40 billion. These purchases will remain elevated for “a few months” before slowing. Operational limits on standing overnight repo operations were also lifted. Technically, this is not quantitative easing—but functionally, it injects liquidity into the banking system, boosts reserves, and eases short-term funding conditions. As history showed in 2019, this kind of “not-QE” liquidity support can have disproportionately positive effects on risk assets, volatility suppression, and leverage conditions.

Market reaction reflected that reality. S&P 500 futures popped immediately, yields edged lower at the front end, and the curve nudged into a bull-steepening configuration—exactly the setup that historically favors equities, credit, and momentum-driven assets. Liquidity returning to the system tends to matter far more for asset prices than incremental tweaks to forward rate guidance.

Internally, the Fed remains divided. The policy decision passed by a 9–3 vote. Stephen Miran dissented in favor of a larger 50-basis-point cut, while Austan Goolsbee and Jeffrey Schmid preferred no cut at all. That three-way split highlights the growing tension inside the Committee: some members see downside labor risks as urgent, others remain wary of cutting too early with inflation still above target. For markets, that division is not destabilizing—it simply reinforces that the Fed is navigating a narrow corridor between easing too little and easing too much.

Taken together, the December decision offers a constructive roadmap for markets. The Fed cut as expected. It maintained a slow, deliberate glide path toward neutral. It upgraded growth, lowered inflation projections, and avoided any hawkish repricing of the dot plot. Most importantly, it quietly pivoted liquidity conditions from tight toward loose via Treasury bill purchases.

The conclusion is straightforward: this Fed meeting does not threaten the year-end rally. If anything, it reinforces it. Policy is easing gradually, liquidity is increasing, inflation is cooling faster than expected, and growth is holding up better than feared. That is not the backdrop for a policy-driven market derailment—it is the backdrop for a market that can continue to grind higher into year-end, powered less by multiple expansion and more by improving macro confidence and renewed liquidity support.

In short, the Fed delivered exactly the kind of “boring but bullish” outcome risk assets tend to like best.