On the Fed’s ‘Hawkish Cut’

The Fed cut its policy rate by another quarter-point Wednesday, reducing the fed-funds target range to 3.50% - 3.75%. Headlines dubbed this a “hawkish cut,” as policymakers added a new line pledging to “carefully assess incoming data, the evolving outlook, and the balance of risks” before making another move. The prospect of a 2026 devoid of fresh Fed help gave all the coverage a bit of a blah tone. To us, that is unwarranted. This year has already proven Fed policy isn’t a huge economic driver. Stocks have long since moved on.

You see, the Fed hasn’t exactly been flying its proverbial helicopter of money over the US this year. Rate cuts were paused between December 2024 and September 2025’s meeting. Meanwhile, “quantitative tightening” (QT) continued through early December as the Fed shrank its balance sheet, sucking reserves out of the banking system. If you believe conventional wisdom, this all should mean lending conditions worsened.

Only, they didn’t. Total loan growth began 2025 at a 2.7% year-over-year rate.^[i] On Thanksgiving Eve—the latest figure available—it stood at 5.4% y/y.^[ii] Yes, even as rates stood pat and the Fed’s balance sheet shrank, the loan growth rate doubled. Business lending looks worse, at first blush, with negative year-over-year growth rates all year, but this is an after-effect of a data reclassification that took effect on January 1. We won’t bore you with the technicalities, but that shaved over $100 billion off the tally of outstanding commercial and industrial loans—not because those loans got vaporized, but because they were reclassified as “other” lending. Since then, business lending is up 1.9% year to date, using seasonally adjusted weekly data.^[iii]

Given monetary policy tends to affect the real economy at a lag (6 – 18 months is the popular economist estimate), you can’t draw a direct line between this year’s monetary policy and loan growth. But that actually supports our point. The Fed cut rates just three times in 2024, reducing the fed-funds target range by one percentage point (from 5.25% - 5.50% to 4.25% - 4.50%) from September through December.^[iv] QT, which started in 2022, remained ongoing. If that relatively tighter backdrop preceded improved lending this year, we fail to see a strong argument that more Fed help is a major driver. Seems to us banks are chugging along regardless. Not that we are fundamentally opposed to rate cuts—they steepen the yield curve, which, yay—but they are rather far down the economic driver power rankings.

So based on how conditions look now, we doubt it is a massive headwind if the Fed holds pat next year. Fed Senior Loan Office Opinion surveys showed fewer banks tightening commercial lending standards in 2025’s second half, while demand improved. In other words, banks are gradually loosening the purse strings, and businesses are taking them up on it. That augurs well for continued loan growth, which fuels broader economic growth.

But also, monetary policy isn’t set in stone. That addition to the Fed’s statement that was supposedly so hawkish? It was basically a standard reminder that the Fed is data-dependent, just with an adverb thrown in. That adverb probably generated a lot of internal debate, but these things tend to add distinction without much meaning.^[v] Don’t read into it. Or the fact that three Federal Open Market Committee members voted against today’s rate cut.^[vi] Or the “dot plot” of Fed people’s forecasts showing six project a rate hike next year. It is all meaningless. Fed faces will change, data will change, forecasts will change … only the human factor is constant. And it is always wild and unpredictable.

Lastly, regarding something else the Fed did today: While QT ended last week, today’s meeting statement noted the Fed “will initiate purchases of shorter-term Treasury securities as needed to maintain an ample supply of reserves on an ongoing basis.” This is not new quantitative easing. It is not “stimulus.” It is not a policy U-turn. It is a plumbing tool, pure and simple, aimed at aiding liquidity and curbing volatility in repo markets. We have seen some headlines playing a bit fast and loose with all this. But it is nothing more than a metaphorical snake in the drain.^[vii]

As for stocks, they don’t hinge on the Fed. QT and long Fed pauses this year and last accompanied solid returns. Economics is only one market driver, and monetary policy is only one part of that. Stocks’ outlook next year will depend on a host of things. So as you look forward, don’t overrate the Fed for good or ill.

HT: Fisher Investments Research Analyst Davis Zhao