Hawkish or Less Dovish? QE or Not QE?

There is a growing divergence of views among FOMC members. Some remain dovish, favoring more rate cuts. Their argument is based on a belief that inflation will continue to move toward the 2% target and that the weakening labor market benefits from lower interest rates. On the other side of the aisle are hawkish views.

Unlike the doves, they are concerned that inflation could become entrenched at 3% or higher. They do not view the recent weakness in the labor market as overly concerning. The divergent opinions can result in mixed messages from the Fed. As a result, the market was expecting a “hawkish easing.” Was the tone of yesterday’s meeting hawkish, less dovish, or even more dovish?

As we share below, the Fed made very few edits to the prior statement. Given so little has changed, it’s hard to say the Fed has become hawkish. Moreover, as we circle below on the left side, the Fed will begin purchasing Treasury Bills to expand its balance sheet by $40 billion a month and provide the markets with liquidity.

Despite what they may or may not call it, it’s QE. QE is dovish. Given that they stopped QT on December 1 and restarted QE, we would have to characterize the statement as more dovish. Yesterday’s policy change was undoubtedly not a hawkish cut as many expected.

During the press conference, Chairman Powell alluded to the labor market continuing to weaken and his belief that excess inflation is mainly due to tariffs. In fact, he claims inflation would be near 2% if not for the temporary impact of tariffs. His message appears slightly more dovish than at the previous meeting.

Based on the statement, QE, the press conference, and the Summary of Economic Projections (SEP) discussed below, we characterize the Fed’s policy stance as more dovish. It’s worth noting that there were three dissenting votes: one in favor of cutting by 50 bps and two hawkish votes in favor of keeping rates unchanged.

FOMC Letter

Fed’s Summary Of Economic Projections (SEP)

On a quarterly basis, the FOMC polls its members for forecasts on where GDP, unemployment, inflation, and the Fed Funds rate will be at the end of the current year, as well as the following three years and the “longer run.” The SEP is also referred to as the Fed dot plots, as each member’s projection is plotted on a scatter plot, as we share in the second graphic.

Of note:

• The forecast for GDP growth next year rose sharply from 1.8% to 2.3%
• PCE and Core PCE inflation were lowered by one and two-tenths, respectively, for 2026.
• The Fed thinks inflation will fall back to its 2% target by 2027.
• They forecast that unemployment has potentially peaked at 4.5% and will inch down over the next year.
• Fed members are only expecting to cut rates once next year on average. However, the range of expectations is extensive, ranging from 2.1% to 3.9%.
• Longer-run GDP forecasts have remained at 1.8% for quite a while despite AI and the massive data center expansion. The Fed must not think that AI and productivity gains will benefit the economy.

Fed SEP

Fed Dot Plots

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