Why the US Dollar Is Stuck in a Limbo: Decoding the Fed's Deep Policy Rifts

The latest Federal Reserve meeting minutes paint a picture of an institution at odds with itself. With policymakers sharply divided over interest rate strategy, the US dollar faces a crossroads—destined neither to dive on dovish enthusiasm nor to soar on economic strength. The greenback is likely to remain trapped in a sideways range until the data itself breaks the tie.

The Fed’s Internal Battlefield: Where Rate Cut Supporters Hesitate

December’s policy decision unveiled cracks that run deeper than headline decisions suggest. When the Federal Open Market Committee voted 9-3 to reduce the benchmark rate by 25 basis points on December 9-10, the vote count masked far greater disagreements lurking beneath the surface. The minutes, released on December 30, reveal a troubling reality: even those who backed the rate cut were uncertain about their own position.

“A minority of participants who supported lowering policy rates at this meeting indicated that the decision was carefully weighed, or that they could have supported leaving the target range unchanged,” the minutes state. This qualified support signals deep hesitation. Governor Steven Miran pushed for a more aggressive 50 basis point cut, while Chicago Fed President Austan Goolsbee and Kansas City Fed President Jeff Schmid argued for no cuts whatsoever.

The fracture extends further. Six officials within the broader 19-member policymaking group signaled opposition to the December move altogether, preferring to keep rates in the 3.75% to 4% range. Some explicitly noted that “after this month’s rate cut, it may be appropriate to keep the target range unchanged for some time”—essentially calling for a pause in the easing cycle.

The divergence on 2026 projections underscores the confusion. While the official median forecast indicates only one 25 basis point reduction next year, individual projections scatter wildly. Market participants, meanwhile, are pricing in at least two cuts. The probability of a January 2026 rate cut has settled at roughly 15% based on federal funds futures, a telling reflection of the committee’s muddled guidance.

Inflation vs. Employment: The Impossible Choice

The deeper ideological battle within the Fed mirrors a classic policy dilemma. One faction prioritizes labor market protection. The minutes note: “Most participants believed that moving to a more neutral policy stance would help guard against the possibility of a severe deterioration in labor market conditions.” November’s unemployment data—rising to 4.6%, the highest since 2021—provided ammunition for this camp.

Yet the other side worries about complacency. The minutes emphasize: “Some participants noted the risk of inflation remaining elevated and pointed out that further rate cuts in the context of currently high inflation readings might be misinterpreted by the markets as a weakening of policymakers’ commitment to achieving the 2% inflation target.” Economic growth at a 4.3% annualized pace in Q3—the fastest in two years—feeds these inflation hawks’ concerns.

Chair Jerome Powell’s influence proved decisive. One analyst noted the split decision “clearly shows that Chair Powell pushed for the rate cut,” suggesting the outcome could have swung either direction. The real question: how long can Powell hold this coalition together?

The Dollar’s Narrow Path Forward

For currency markets, the Fed’s internal strife translates to structural uncertainty. The US dollar cannot collapse into a dovish rally because hawkish voices remain loud enough to defend it. Conversely, it cannot break higher on growth strength because the rate-cut cycle has already begun and employment remains a legitimate concern.

The result: a range-bound trajectory. Trading logic will ping-pong between recession anxiety and inflation risk, with the dollar anchored in a narrow band until clearer data emerges. Market participants face a volatile but confined range where each data release becomes a temporary directional catalyst, only for counterarguments to reassert themselves.

On December 31 during Asian trading, the US Dollar Index hovered near 98.20-98.22, embodying this equilibrium. Neither breaking above nor falling below—caught in the tension between two warring philosophies at the world’s most influential central bank.

Until one narrative decisively defeats the other, expect the dollar to remain compressed within this uncertain middle ground.