FOMC Meeting Preview: How the FOMC's December Dot Plot Will Affect the US Dollar (DXY)

The meeting of the Federal Open Market Committee (FOMC) on December 10, 2025, is a highly important final decision of the year that will determine the immediate direction of interest rates and set expectations for next year's monetary policy. This event is unusually difficult to predict because the policymakers are facing conflicting economic reports such as a softening job market versus still-elevated inflation and are significantly divided over what action to take.

In short, it is the year's last major rate decision, and the mixed signals and internal disagreements among the committee members make the outcome exceptionally unpredictable.

Interest Rate Probabilities Ahead of FOMC

The importance of the December 2025 decision is made much harder by the fact that the Federal Reserve (the Fed) is essentially flying blind right now. The Fed usually bases its decisions on the latest government data about jobs and inflation, but a recent six-week government shutdown has completely stopped the publication of these key statistics. Because of this, the FOMC is meeting on December 10th without any official government inflation or jobs data since September.

The Fed have been forced to rely on unofficial, "private" reports, like the recent ADP report which showed a worrying loss of 32,000 jobs. If this private data is accurate, the Fed needs to cut rates immediately to avoid a recession, but if the private data is wrong, cutting rates could cause inflation to surge again.

Data Void and Release Dates

This lack of data forces the Fed to confront the two parts of its mission: keeping prices stable (low inflation) and supporting maximum employment (low unemployment) which are now in direct conflict.

On the one hand, the labor market is showing dangerous cracks. While the unemployment rate is currently 4.4%, the speed at which it's rising is setting off a major recession warning signal, known as the "Sahm Rule." This situation argues for an immediate rate cut to prevent a potential "hard landing" recession. On the other hand, the fight against inflation is not over.

Inflation, as measured by the Fed's preferred index, is stuck at 2.8%, which is almost a full percentage point above their 2.0% target. Cutting rates now could cause inflation to rebound, especially with the potential for new government spending and tariffs. Because they lack the recent data to settle this argument, the December meeting has become a battle between policymakers' opposing fears: the "doves" worry more about a recession, while the "hawks" worry more about runaway inflation.

Despite the economic confusion, the majority of market participants expect the FOMC to make a "safety cut" of 25 basis points (a quarter of a percent). The logic is that this small cut is an insurance policy against the job market completely collapsing, but it's not so large that it fully gives up the fight against inflation.

However, this market consensus hides a major disagreement within the Committee itself. Analysts predict a historically high number of dissenting votes (policymakers who vote against the decision), which would signal to investors that Chair Powell has lost control of the policy message and would introduce a lot of uncertainty for the following year.

The "Dot Plot" Battlefield

The real fight isn't just about the current rate cut, but about the communication of future interest rates. This is shown in the "Dot Plot" , a chart that shows where each Fed member expects the interest rate to be in 2026 and beyond. The market is currently expecting the Fed to cut rates roughly four times in 2026, which would send the stock market soaring (the Bull Case). But some forecasters predict the Dot Plot will show a median expectation of only two cuts for 2026. This would be a "hawkish cut" meaning the Fed cuts now but signals they are nearly done which would severely disappoint the market and could lead to a drop in stock prices.

The "Powell Put" vs. The "Trump Call"

The political dimension of this meeting cannot be overstated. With the transition of power looming in January 2026, the Federal Reserve is under intense scrutiny. President-elect Trump has advocated for lower rates to offset his proposed tariff regime. Powell must navigate the optics of appearing politically independent.

If he cuts aggressively, he risks accusations of juicing the economy for the incoming administration or bowing to political pressure.

If he holds, he risks accusations of sabotaging the economic handover. This political shadow suggests Powell will likely opt for the middle path: a 25bps cut (to satisfy the growth mandate) coupled with stern language about data dependence (to satisfy the inflation mandate).

The Dollar's Dilemma

The US Dollar (DXY) is currently caught between cyclical weakness and structural strength. Seasonally, December is a weak month for the Greenback. However, the medium-term outlook is dominated by the concept of divergence.

The Bear Case for USD: The Fed cuts rates, acknowledging a slowing US economy. The yield advantage that the Dollar enjoys over the Euro and Yen erodes. Simultaneously, the uncertainty regarding the next Fed Chair potentially the dovish Kevin Hassett leads markets to price in a "lower for longer" regime. This pushes EUR/USD back toward 1.15.

The Bull Case for USD (The Disappointment Trade): This is the more nuanced risk. The market is pricing in aggressive cuts for 2026. If the Fed's Dot Plot pushes back, signaling "patience," yields at the short end of the US curve (2-year Treasury) will spike. This would catch Dollar bears offside, triggering a short squeeze that rallies the DXY.

Furthermore, if the US economy continues to grow at 2% while the Eurozone stagnates, the "US Exceptionalism" trade remains the dominant force, putting a floor under the Dollar.

US Dollar Index (DXY) Daily Chart, December 8, 2025

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