Federal Reserve's December decision imminent: Rebuilding the rate hike path, the 2026 dot plot becomes crucial

The market has priced in rate cuts, now the focus is on the “subsequent interpretation”

The Federal Reserve is scheduled to announce its latest interest rate decision on December 10th, Eastern Time, and the market has already formed a consensus ahead of this meeting. According to data from the CME FedWatch Tool, investors expect an 87% probability of a 25 bps rate cut in December, with only a 13% chance of maintaining the rate at the 3.75%-4.0% level. Goldman Sachs’ analysis further confirms this judgment — the US labor market has shown clear signs of cooling, fully supporting the decision to cut by 25 basis points this month.

Since a rate cut seems almost certain, the market’s real focus has shifted to two core issues: 1. How will the Federal Reserve depict the rate hike outlook for 2026; 2. After stopping balance sheet reduction, will a new round of asset purchases be initiated?

Reserve Management Purchase Plan (RMP) will become an official signal

According to Evercore ISI’s forecast, the Federal Reserve is expected to officially announce the promotion of the “Reserve Management Purchase” (RMP) at this meeting, aimed at increasing liquidity in the financial system. The plan is expected to start in January 2025, with an initial scale of $35 billion in short-term government bond purchases per month.

Bank of America offers a more detailed market interpretation: the RMP could be launched as early as January 1st next year, and the monthly purchase scale will be a key signal for policy stance. If the purchase amount exceeds $40 billion, it will have a positive effect on market spreads; conversely, if it falls below $30 billion, investors may interpret it as a sign of policy shift.

The “hawk-dove” battle behind the dot plot

The December dot plot will directly answer the market’s most concerned question: how many times will the Federal Reserve cut rates in 2026?

Compared to the September dot plot, FOMC members’ median forecast for the 2026 rate is 3.4%, which implies they expected only one rate cut at that time. However, current market expectations point to two rate cuts in 2026. If the December dot plot remains consistent with September (predicting only one cut), it will be widely interpreted as a hawkish signal, indicating that concerns about inflation still persist. Conversely, if the new dot plot shows more than two rate cuts in 2026, it will reinforce dovish expectations and boost market confidence in a loosening cycle.

The “confidence premium” in Powell’s remarks

Federal Reserve Chair Jerome Powell’s statements during the press conference are also worth noting. Bank of America predicts Powell’s language will lean toward a hawkish stance. But there is an interesting paradox here: after each time Powell signals a hawkish stance, the Fed ultimately chooses to cut rates, which has led to persistent skepticism among investors about his commitment to raising rates.

Furthermore, in the weeks following the meeting, a large amount of economic data will be released, further complicating Powell’s ability to clearly state his position. In other words, the market’s final judgment on the Fed’s rate hike path may not rely solely on the Chair’s words but will cross-verify them with subsequent data performance.