- The Fed cut the federal funds rate 25 bps to 3.50–3.75% in December 2025 on labor-market cooling despite inflation still above 2%.
- The 9–3 vote exposed sharp internal disagreement, with two dissents favoring no change and one favoring a larger 50 bp cut.
- Policymakers’ 2026 outlook is cautious, with the median projecting one more cut but a wide range from none to multiple.
- Uncertainty is elevated due to post-shutdown data disruptions, inflation persistence, and the impending May 2026 Fed chair transition.
Read More
The Fed’s decision to lower rates in December 2025 to a 3.50–3.75% range is grounded in concern over labor market weakening, while inflation—though moderated—remains above the 2% target. The close 9–3 vote indicates that the decision was anything but unanimous. Those dissenters reveal tensions within the FOMC: some are more worried about inflation overheating, others more concerned by the risk of economic slowdown.
Forecasts for 2026 show that most officials expect only one further cut, reflecting a shift toward patience in monetary easing. The Fed’s “dot plot” shows a wide dispersion of views. Some see rate stability as preferable; others still lean toward additional easing, conditional on data. The Fed’s communication post-meeting emphasized that future adjustments depend heavily on evolving risks and incoming indicators.
Key open questions for investors and strategists include: How reliable are labor market and inflation statistics following delays induced by the six-week government shutdown? Are inflationary pressures more persistent than represented? Who will be chosen as Powell’s successor when his term ends in May 2026, and what policy stance will the new Chair represent? All pose material risk to asset allocation, interest rate policy, and communication dynamics.
Supporting Notes
- The rate cut: Fed lowered benchmark rate by 25 bps to a range of 3.50–3.75% at December meeting.
- Dissenters: Three voting members dissented—two voted to hold; one preferred 50 bps cut.
- Inflation rate in November 2025: 2.7%, above Fed target of 2.0%.
- Unemployment rate rose to about 4.6%—labor market softening evident.
- Median projection for 2026: one more rate cut. But individual projections ranged from zero to multiple cuts.
- Data delays: Six-week government shutdown disrupted economic releases, complicating policy.
- Leadership transition: Chair Jerome Powell’s term ends in May 2026; selection of new chair is underway.
Sources
- apnews.com (AP News) — 2026-01-01
- www.ft.com (Financial Times) — 2025-12-10
- www.lemonde.fr (Le Monde) — 2025-12-11
- en.wikipedia.org (Wikipedia) — 2025-12-10