Mixed Signals: Fed's Dovish Pivot Masks Rate Cut Caution

December 10, 2025 — The Federal Reserve’s latest policy decision sent conflicting messages to markets this Wednesday, ultimately sparking a rally across most major benchmarks. The Russell 2000 small-cap index accelerated to fresh record territory, while broader indices showed varied enthusiasm. Treasury yields retreated sharply, with the 10-year sliding back below 4.2% following the Fed’s statement and subsequent commentary.

The Dow gained 497 points (+1.05%), while the S&P 500 added 46 points (+0.67%). The Nasdaq lagged comparatively with a +77 point advance (+0.33%), though the Russell captured the session’s momentum with a +1.32% surge. Year-to-date performance remains robust, with indices climbing between +12% (Dow) and +22.5% (Nasdaq), demonstrating the resilience of equity markets despite ongoing economic uncertainty.

The FOMC Decision: A Softer Stance Than Expected

In what was billed as a hawkish rate cut, the Federal Open Market Committee (FOMC) instead delivered what many observers characterized as a dovish package overall. The central bank reduced its benchmark Fed funds rate by 25 basis points to a 3.50-3.75% range, but the real surprise came from dissenting voices within the leadership itself.

For the first time in six years, three officials broke ranks with the consensus. Chicago Fed President Goolsbee and Kansas City Fed President Schmid both voted against any reduction this cycle. Meanwhile, Fed Governor Stephen Miran — representing the incoming administration’s perspective — pushed harder in the opposite direction, advocating for a 50 basis-point cut instead.

What truly shifted sentiment toward accommodation was the acceleration of the Fed’s balance sheet expansion. Beginning within days, the central bank announced it would purchase $40 billion in Treasury bills monthly to maintain ample reserve levels. This maneuver represents a meaningful escalation from earlier expectations of $20-30 billion in purchases sometime after year-end, effectively cementing the dovish character of this meeting despite the modest 25 bps reduction.

Economic Projections Point to Caution

The Fed’s updated economic forecasts suggest moderating optimism. Gross Domestic Product (GDP) growth for 2026 was raised half a percentage point to 2.4%, while inflation expectations ticked down marginally to 2.5%. By 2027, inflation is projected to settle at 2.1%.

However, the dot plot — which reveals individual Fed officials’ rate expectations — painted a restrictive picture going forward. Eleven policymakers now envision one or fewer rate cuts throughout 2026, with seven favoring no reductions at all. Governor Miran stands as the dovish outlier, projecting the Fed funds rate at roughly 2.12% a year hence, implying approximately 125 basis points of cuts.

Fed Chair Powell emphasized that current rates remain near the economy’s neutral level and reiterated the institution’s preparedness for evolving conditions. Since peaking in September 2024, the Fed has reduced rates by a cumulative 175 basis points.

Earnings Deliver Mixed Returns on Technology

Oracle Corporation released second-quarter results that underscored the durability of cloud and artificial intelligence demand. The enterprise software giant posted earnings-per-share of $2.26, significantly eclipsing the $1.63 consensus estimate. Revenue of $16.1 billion fell marginally short of expectations at $16.15 billion.

The standout metric was Remaining Performance Obligations (RPO), a forward-looking metric that continued surpassing projections. AI and cloud infrastructure overruns for major clients expanded 438% year-over-year — a pace exceeding even the prior quarter’s gains. Despite these operational strengths, ORCL shares declined 3.8% in after-hours trading ahead of the company’s call.

Adobe Inc. reported robust adoption metrics for its generative AI capabilities in the fiscal fourth quarter. Earnings of $5.50 per share surpassed the $5.39 consensus (and improved substantially from $4.81 a year prior), while revenue of $6.19 billion exceeded estimates of $6.10 billion. Management raised guidance for the upcoming quarter, propelling shares +1% in late trading.

Synopsys Inc. similarly beat expectations with fiscal Q4 earnings of $2.90 per share against a $2.79 forecast, and $2.26 billion in revenue topping the $2.25 billion estimate. The semiconductor design specialist announced an $11.4 billion backlog and guided revenues higher for the coming period, driving shares +5.5% in extended hours.

The Broader Implication

The spread between 2-year and 10-year Treasury yields expanded to 60 basis points — the widest differential in recent years — reflecting market expectations that the Fed may maintain restrictive policy longer than initially priced. While the Russell and other equity measures rallied on the incremental dovishness of expanded asset purchases, the internal dissent and forward guidance suggest policymakers remain genuinely divided on the appropriate path forward.