Clarity on Neutral, Division on the Path

Main takeaway: Powell’s message was clearer than the vote. Despite a divided Committee and expectations for a hawkish cut, the December FOMC delivered an outcome that was dovish relative to expectations, anchored by repeated emphasis that policy is now “well positioned.”

That phrase was not accidental.

“Well Positioned” Was the Signal

Chair Powell returned to the term “well positioned” repeatedly during the press conference. The repetition mattered. It signaled the Fed’s belief that policy has reached the neutral range — no longer actively restrictive, but not stimulative either. From the Fed’s perspective, this positioning creates flexibility rather than urgency.

In practical terms, reaching neutral raises the bar for further cuts. Policy no longer needs to move quickly. Instead, it can wait for clearer confirmation from the data.

Inflation Is Now an Interpretation Debate

Inflation, as framed by Powell, is no longer primarily a measurement problem — it’s an interpretation problem.

The Chair strongly implied that recent inflation pressures are tariff-driven and concentrated in goods prices, rather than indicative of a renewed, broad-based inflation impulse. Services inflation and shelter costs are expected to continue disinflating, reinforcing the view that underlying inflation dynamics remain contained.

Reasonable policymakers can disagree on whether tariff-driven inflation proves transitory. That disagreement sits at the heart of the current policy divide.

The Labor Market Looks Softer Beneath the Surface

Headline labor data still appear stable, but Powell acknowledged that conditions may be weaker than the numbers suggest.

Beneath the surface, the labor market is showing familiar late-cycle patterns: hiring freezes instead of layoffs, reductions in hours rather than headcount, rising youth unemployment, and falling job churn. On top of that, future revisions related to the birth–death model may reveal that unemployment has been understated.

Taken together, these signals point to a labor market that is cooling gradually, not collapsing — but clearly softening.

Two Judgment Calls Drive Policy

At this stage of the cycle, policy is being driven less by definitive data and more by judgment calls.

Is inflation truly a one-time tariff effect?Will labor-market weakness deepen meaningfully, or stabilize?

These questions do not yet have conclusive answers. They are matters of belief, probability, and interpretation — not proof. That ambiguity explains why the Committee is divided even as the policy destination becomes clearer.

The Dots Confirm Neutrality

The Summary of Economic Projections reinforces this message. Rate expectations for both 2025 and 2026 show tight convergence, signaling growing agreement around where policy should sit.

The more subtle development lies in 2026. For the first time in four quarters, the dots drift modestly higher, suggesting the Fed sees less room for further cuts beyond the current range. This does not signal tightening, but it does imply that neutral is increasingly viewed as a durable resting place, not a temporary waypoint.

Bottom Line

The Fed is unified on where policy sits, but divided on how the data will evolve. That combination favors flexibility over urgency, raises the bar for additional cuts, and leaves markets highly sensitive to marginal inflation and labor surprises.

In other words, the destination is clearer — the path remains contested.