Fed’s 25bp Rate Cut Amid FOMC Divide Triggers Market Reversal

This analysis is based on the ETF Trends report [1] published on December 12, 2025, covering the Federal Reserve’s 25bp rate cut. On December 10, the Fed lowered the policy rate range to 3.50–3.75% with a 9-3 vote, marking the first three FOMC dissents in six years [1].

:

• Initial Rally (Dec 10–11)
  : Major indices gained: S&P 500 (+0.78% on Dec 10, +0.58% on Dec 11), Dow Jones Industrial Average (+1.02% on Dec 10, +1.29% on Dec 11), Nasdaq Composite (+0.50% on Dec 10, +0.36% on Dec 11) [0].
• Reversal (Dec 12)
  : Indices declined: S&P 500 (-0.70%), Dow (-0.37%), Nasdaq (-0.95%) [0].

: Rate-sensitive sectors were hardest hit: Utilities (-4.6%), Real Estate (-1.01%), Financial Services (-1.19%), Technology (-1.2%) [0]. Basic Materials (+1.4%) was the only major sector with positive performance [0].

: The 30-year Treasury yield rose to its highest level since early September [0].

The Dec 12 reversal stems from the Fed’s projection of only one additional 2026 rate cut—well below market expectations. The three dissents also signal a growing divide among policymakers, reducing the market’s confidence in a sustained dovish cycle [1].

1. Guidance Trumps Initial Rate Action
   : The market’s initial enthusiasm faded rapidly once the Fed’s conservative 2026 rate outlook emerged, demonstrating that forward guidance is a more critical driver of short-term market sentiment than rate cuts alone [0].
2. Rate-Sensitive Sectors Are Vulnerable
   : Utilities and Real Estate underperformed due to reduced appeal of their high dividends relative to other assets, as fewer projected rate cuts limit future yield compression [0].
3. FOMC Divides Amplify Uncertainty
   : Three dissents (the highest in six years) indicate increasing policy fragmentation, a key driver of potential market volatility as investors struggle to predict future Fed moves [1].

:

• Policy Uncertainty
  : The growing FOMC divide increases uncertainty about future rate paths, which could trigger increased market volatility [0].
• Inflation-Centric Reversal
  : If inflation remains elevated, the Fed may pause or reverse rate cuts, further harming rate-sensitive sectors [0].
• Higher Borrowing Costs
  : Rising long-term Treasury yields could increase borrowing costs for businesses and consumers, slowing economic growth [0].

:

• Cyclical Sector Resilience
  : Basic Materials’ outperformance (+1.4%) suggests potential resilience in cyclical sectors amid shifting monetary policy expectations [0].

• The Fed cut the federal funds rate by 25bps to 3.50–3.75% on December 10, 2025, with three FOMC dissents (first in six years) [1].
• Markets rallied Dec 10–11 but reversed Dec 12 due to the Fed’s projection of only one additional 2026 rate cut (below market expectations) [0].
• Rate-sensitive sectors underperformed; Basic Materials was the only positive major sector [0].
• The 30-year Treasury yield reached its highest level since early September [0].
• Growing FOMC divide increases policy uncertainty, a key risk factor for markets [1].