Fed Minutes Expose Split on 2026 Cuts, Shaking Yields and Dollar

A divided Fed shifts the rate path from calendar to data

The December Fed minutes released on Tuesday, Dec. 30, 2025, show policymakers wrestling with how fast to ease after lowering the federal funds target range to 3.50%–3.75%. The details matter because the committee’s disagreement can jolt pricing in Treasury yields and dollar markets even when the policy rate itself is unchanged between meetings.

The minutes describe a debate that is no longer about whether restrictive policy should eventually be unwound, but about the sequencing. Some officials argued inflation progress has slowed enough to justify patience, while others leaned on signs of cooling in hiring and wage pressures to support the December cut. That split pushes investors to treat each inflation and labor release as a fresh referendum on the 2026 rate cuts path.

In markets, the first-order mechanism runs through real yields. When real rates rise, long-duration stocks tend to face multiple pressure, while a softer real-rate profile usually supports risk appetite and compresses credit spreads. The minutes add weight to that tug-of-war heading into 2026.

The split vote changes how traders interpret the next move

A divided committee often produces a different kind of volatility than a surprise hike or cut. It can turn forward guidance into a narrower set of conditional triggers, and that increases the sensitivity of the front end of the curve to each data point rather than to broad narrative.

The Fed minutes show officials weighing two risks that pull in opposite directions: the risk of easing too soon and allowing inflation to reaccelerate, and the risk of holding policy too tight and driving a sharper slowdown. The more evenly balanced that argument becomes, the more two-year yields can swing on short-term inflation prints, even if the 10-year remains anchored by longer-run growth expectations.

That dynamic also affects the dollar. When traders price fewer 2026 rate cuts, the dollar often strengthens against low-yielding currencies, tightening global financial conditions at the margin. When cuts are repriced back in, the dollar can ease, supporting commodities and emerging-market assets.

Inflation confidence is the committee’s gating item

The minutes show policymakers still focused on whether inflation is moving toward 2% in a way that looks durable, not episodic. Officials discussed the risk that inflation could settle into an uncomfortable range, especially if supply-side improvements fade or if demand holds up better than expected.

That is why the committee’s preferred inflation measures and near-term inflation expectations retain outsized importance. A single soft print is less persuasive when the committee is split. A sequence of softer readings, paired with stable longer-term expectations, is what lowers the hurdle for additional easing.

For stocks, this matters because equity valuations have been supported by the idea that the tightening cycle is over and that a gradual easing path is ahead. If inflation confidence erodes, the multiple that investors pay for growth cash flows can compress quickly, even if earnings are steady.

Labor-market cooling is the counterweight, and it is becoming clearer

The minutes describe a labor market that is no longer running hot. Officials pointed to slower job growth, reduced vacancy pressures, and signs that wage gains have moderated from prior peaks. The policy question is whether that cooling is a controlled normalization or a transition into a more pronounced slowdown.

A clearer downshift in hiring would support the case for more 2026 rate cuts, because it lowers the probability that inflation reaccelerates through wages and services pricing. A re-acceleration in payroll momentum would do the opposite, and the split committee would likely lean toward holding policy steady longer.

For credit spreads outlook, labor matters because it drives default expectations. A gentle cooling tends to keep spreads contained, while a sharper slowdown typically widens spreads as refinancing risk rises for weaker balance sheets.

Liquidity and balance-sheet plumbing can amplify year-end moves

The minutes also highlight operational steps to keep short-term rates well controlled through ample reserves. Even when the headline story is the policy path, funding conditions can drive day-to-day swings in short-dated yields and contribute to cross-asset volatility in thin year-end liquidity.

If funding stress emerges, it can push short-term yields higher relative to the policy rate, tightening financial conditions without a formal hike. If liquidity is smooth, the market’s focus stays on inflation and labor data, which is where the committee’s internal split is most consequential.

How the market can reprice without a change in the policy rate

The most likely repricing channel is the expected path, not the next meeting decision. A small change in how traders price the number of cuts can move the two-year note more than the policy rate itself, and that can feed through to mortgage rates, corporate borrowing, and equity discount rates.

That is the reason the phrase “Treasury yields and dollar” keeps showing up in portfolio hedges. When yields firm and the dollar rises, risk appetite can fade, tightening financial conditions in a way that looks like policy action. When yields fall and the dollar softens, conditions ease, supporting stocks and compressing spreads.

S&P 500 sensitivity to rates is therefore the practical test. If rate expectations shift up, the index can trade lower even with strong earnings, because discounting dominates. If the expected path shifts down, equities can hold firm despite mixed data, because the discount rate tailwind offsets uncertainty.

What to watch next

The first trigger is the next inflation report in early January 2026, because a firm reading would reinforce the cautious camp in the minutes, while a softer print would validate the December cut and pull 2026 rate cuts forward. The second trigger is the next jobs report, with particular focus on average hourly earnings and participation, because those data points shape the wage-inflation channel that split the committee. A third trigger is the January 2026 policy meeting, where language around “further” progress on inflation will be watched for any shift in confidence. A fourth trigger is financial conditions, including whether credit spreads outlook remains stable or begins to widen, which would pressure the committee to prioritize growth risks. A fifth trigger is the dollar’s tone, since a stronger dollar can tighten conditions globally and feed back into U.S. growth expectations.