The Breakdown - The Fed Is Fracturing

Episode Date: December 12, 2025

Today’s episode breaks down one of the most contentious FOMC meetings in nearly a decade. A deeply divided Fed delivered a rate cut that may also mark the end of the cutting cycle, with multiple dissents on both the dovish and hawkish sides and an unusually fractured dot plot. The conversation explores what the dissents reveal about competing inflation and labor-market risks, why Powell says the Fed is effectively flying blind without fresh BLS data, and how alternative data is shaping the debate. It also examines the quiet but significant shift in balance-sheet policy, as the Fed ends QT and begins reserve management purchases that many see as “QE that isn’t QE,” and what this hawkish cut, baby QE, and a broken consensus mean for markets heading into an increasingly uncertain 2026 outlook.

Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. What's going on, guys? It is Thursday, December 11th, and that means we are talking, of course, about the FOMC meeting that just was. Before we get into that, however, if you are enjoying the breakdown, please go subscribe to it, give it a rating, give it a review, or if you want to dive deeper into the conversation, come join us on the Breakers Discord. You can find a link in the show notes or go to bit.ly slash breakdown pod. All right, friends, well, a deeply divided Fed did end up cutting rates, but that might be it for the cutting cycle. On Wednesday, Chair Jerome Powell delivered the most contentious cut in almost a decade with three dissents on the FOMC and even more disagreement from non-voting regional presidents.

Trump-aligned Fed Governor Stephen Moran once again dissented on the Dovish side, preferring a 50-bases point cut. Meanwhile, Austan Gouldsby from Chicago and Jeff Schmidt from Kansas City also dissented, but in the other direction voting to hold rate steady. This meeting featured a new summary of economic expectations or SEP, which includes the dot plot. That means we got to see how each of the Fed presidents would have decided if they had a vote to cast. Six members marked down no rate cut to end this year, implying they would have dissented. So four Fed presidents registered their silent dissent through the SEP, and six of 12 presidents were against this cut. Patrick Harker, who retired as Philadelphia Fed president in June commented to Bloomberg, it's very unusual. In my 10-plus

years of being involved with the Fed, I haven't seen this. However, he continued, I would have been one of those silent dissents. I think the cut is a mistake. The argument for holding rates steady at this meeting is that GDP has been surging, suggesting a risk that inflation comes roaring back. The Atlanta Fed's GDP now estimate for Q3 is currently at 3.5% and had been as high as 4% in late November. Q2 GDP growth was 3.8%, so it looks like the U.S. economy, at least in terms of GDP, is rebounding strongly from a slightly negative print in Q1. Commenting on the disagreement, Powell said, a very large number of participants agreed that risks are to the upside for unemployment and to the upside for inflation. So what do you do? You've got one tool. You can't do two things at once. It's a very

challenging situation. Although Powell has been a consensus builder throughout his time as Fed chair, the disagreements are now clearly breaking through. The dot plot showed a huge spread of rate predictions for next year. The median forecast was for a single cut, but that understates the spread of opinions. Three FOMC members penciled in a hike, or more likely no cut this week and none in 26. Four members were happy to hold rates where they are now throughout the next year. Another four forecast a single cut next year, and seven are expecting between two and four cuts next year. And an outlier who is probably, we assume, Stephen Moran, believes it will be appropriate to cut rates six times to bring Fed funds to between two and two. Two. The best that

Powell could really offer on forward guidance was that he doesn't know. He punted on the question when asked if it was a foregone conclusion that the next rate move would be a cut. All he said was that he didn't see a rate hike as anyone's base case. Personally, he added, I could make a case for either side. However, he said that the FOMC believed they were in a good position to wait and see how the economy evolves. Indeed, a lack of official data is still complicating matters. We haven't seen a jobs or inflation print from the BLS since the September data. That data, which is now almost three months out of date, showed unemployment had moved up from 4.1 to 4.4%. Inflation was also rising slightly moving from 2.9 to 3%. In the absence of official data, forecasts have moved to

private sector alternatives. Challenger, who published a well-regarded measure of private sector layoff announcements, showed 153,000 job cuts announced in October and another 71,000 in November. That October number was the highest figure since March. However, in their November report, which was released last week, Challenger noted that this year's layoff announcements totaled $1.1 million, making this the worst year since the pandemic. Payroll processor ADP, who published their real-time data, confirmed labor market weakness in their latest report that was also released last week. They said that private employers shed 32,000 jobs on net in November, however, small firms with less than 50 employees had 120,000 job cuts for the month. Powell said that his belief

is that the monthly payroll numbers have been overstated since April. Instead of an average of 40,000 job gains, he believes the true number is negative 20,000. He said, I think you can say the labor market has continued to cool gradually, maybe just to touch more gradually than we thought. It doesn't feel like a hot economy that wants to generate a Phillips curve type of inflation. Now, that refers to the wage price spiral where a tight labor market drives wages up, which spills into inflation. For alternative inflation data, we can look to the Cleveland's Fed Nowcast, which shows that CPI inflation reached 3.2% in November and is currently on track for 2.9% in December.

So inflation is still hot, but it doesn't look to be breaking out to the upside. Legacy internet and infrastructure are brittle, plagued by downtime, coverage gaps, and outdated financing models. communities and builders are left behind while capital sits locked out. Althea is changing that. Since 2018, their technology has powered resilient, sustainable networks across the U.S. and abroad. With Althea L1, they built the world's first blockchain purpose-built for utilities and telecom, turning infrastructure into a transparent, investable asset class.

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BLS data. However, some have suggested it's a willful blindness. There's clear except that to the downside in the labor market that should be enough to cause concern. However, it's reasonable to suggest that sticky inflation at 3% is also a problem that deserves the Fed's focus. Powell did note that the FOMC isn't expecting a surge in inflation due to tariffs, commenting, let's assume there are no major new tariff announcements. Inflation from goods should peak in the first quarter. One question from the media suggested the real problems in the economy are being masked in the average. Higher income households are driving spending thanks to rising home equity and investment returns, while lower-income households are struggling after four years of

above-target inflation. Powell acknowledged that the K-shaped economy is real, commenting, we hear about this a lot. If you listen to the earnings reports for consumer-facing companies that tend to deal with low-and-moder income people, they'll all say that we're seeing people tightening their belts, changing the products that they buy, buying less, and that sort of thing. So it's clearly a thing. It's also clearly a thing that asset values, housing values, and securities values, are high, and they tend to be owned by people more at the higher end of the income and wealth. As to how sustainable it is, I don't know. Most of the consumption does happen by people who have more means. The top third accounts for way more than a third of consumption, for example.

So it's a good question how sustainable that is. Ultimately, what's clear is consensus that the Fed has broken and there is no way to know it will come next. Powell said, everyone around the table at the FOMC agrees that inflation is too high and that we want it to come down. And agrees that the labor market has softened and that there's further risk. The difference is how do you weigh those risks and what does your forecast look like and where do you ultimately think the bigger risk is? Now, alongside the rate decision, we got a very meaningful change to the policy on open market operations. At the last meeting, the Fed announced the end of QT effective at the beginning of

December. That means the balance sheet is no longer shrinking and maturing bonds are being repurchased from the market. QT had already been reduced to a fairly low rate, so most don't think this policy will have a major effect. However, there was a lot of chatter around the return of QE. In the past, Paola said that QE wouldn't be back, but at the October meeting, he said the Fed might consider growing the balance sheet in line with GDP. The logic being that the level of bank reserve should grow with the economy rather than being held flat. At this meeting, the Fed announced that they would begin the process of buying $40 billion worth of treasury bills per month beginning immediately. The New York Fed's open markets desk said they anticipate the pace of purchases

to run at an elevated level until April and reduce after that. The Fed noted that it wouldn't just be short-dated bills, but they would go all the way out to three-year maturities if needed. The program got a new alphabet soup name, referred to as the reserve management purchases or RMPs. The point that they were trying to make is that RMPs are not QE. The Fed isn't trying to ease liquidity. They're trying to avoid inadvertent tightening. That being said, relative to the tightening that's happened over the past year through QT, this should be liquidity positive on the margins. Felix Javan, the host of Forward Guidance noted, Fed buying up to three-year tenors is pretty dang dovish. I expected one year at most. Of course, every time the Fed does anything with their balance sheet,

everyone does soft their money printer go Burmimes. Hedge funder James Lovish wrote, The Fed will label it reserve management. They will say it is temporary, and they will insist it is not QE. But the reality is that this is a pivot to expansion of the Fed balance sheet, adding liquidity to markets, and is in fact quantitative easing. Probably the simplest way to understand the policy is that it's baby QE at best. Andrea Steno Larson of Steno Research wrote, This is sadly not Lambo QE, more like my Uber is seven minutes away QE. Tiberius tweeted, people seem to be reading what they want to read. I heard Powell say it was temporary to replenish some liquidity and target the funds rate, and that it has nothing to do with

broader monetary policy. Other people are saying money printer go burr. Kongs, who to many is the final word on matters of financial plumbing tweeted, it's not QE. Generally, this meeting is being viewed as a hawkish cut that wasn't all that hawkish as the Fed introduced QE that isn't QE. David Russell, the global head of market strategy at Trade Station said, today's move was the ultimate compromise because Treasury bill purchases are coming sooner than expected, but the dot plot showed few rate cuts next year. Powell threaded the needle again at a time when the Fed is dealing with major pressures. This gives policymakers time to get caught up on the economic data after the shutdown. It makes January a more important meeting, but it still gives investors some holiday cheer.

Christopher Rupke, the chief economist at Forward Bonds, noted that the current position of the Fed could be completely irrelevant for next year's rate policy, writing, The dissents ruled against a faster pace of rate cuts today, but the winds of change are in the air. A new Fed chair in 26 and perhaps many more new Fed officials means more interest rate cuts are coming next year as rate cuts are big on the Trump 2.0 economic agenda. So that is the story, a little bit of needle threading, but there we are. Appreciate you listening as always, and until next time, be safe and take care of each other. Peace.