U.S. Federal Reserve Chair Jerome Powell holds a press conference following a two-day meeting of the Federal Open Market Committee (FOMC), at the U.S. Federal Reserve in Washington, D.C., U.S., December 10, 2025.
| Photo Credit:
REUTERS/Kevin Lamarque
A sharply divided Federal Reserve cut interest rates on
Wednesday but signaled borrowing costs are unlikely to drop
further in the near term as it awaits clarity on the direction
of a job market showing signs of softening, inflation that
“remains somewhat elevated” and an economy it sees picking up
steam next year.
New policymaker projections issued after the U.S. central bank’s
final two-day meeting of 2025 showed a median expectation for a
single quarter-percentage-point cut next year, the same as in
September. But it was accompanied by a wide range of estimates
that starkly illustrated the depth of disagreement about where
to take monetary policy in 2026 and beyond in an economy being
reshaped by President Donald Trump’s policies and an artificial
intelligence investment boom.
“In considering the extent and timing of additional adjustments
to the target range for the federal funds rate, the Committee
will carefully assess incoming data,” the rate-setting Federal
Open Market Committee said in a policy statement that was
tweaked to add language that in the past has been used to signal
a pause in policy actions – an outlook at odds with market
expectations still leaning toward two rate cuts in 2026.
Policymakers’ refreshed estimates – hindered by incomplete
data about the economy after a six-week government shutdown –
also showed they expect inflation to slow to around 2.4% by the
end of next year even as economic growth accelerates to an
above-trend 2.3% and the unemployment rate remains at a moderate
4.4%, an outlook that should dispel worries about potential
stagflation that have persisted this year.
The wide disagreement on the appropriate policy for such an
environment also showed how challenging it could be to build a
consensus in a policymaking body about to experience a
leadership change, with Trump expected to nominate a successor
to Fed Chair Jerome Powell within the next few weeks.
THREE POLICYMAKERS DISSENT
In a press conference after the meeting, Powell said: “I
would note that having reduced our policy rate by 75 basis
points since September and 175 basis points since last
September, the fed funds rate is now within a broad range of
estimates of its neutral value, and we are well positioned to
wait to see how the economy evolves.”
Powell, who repeatedly referenced being in a strong
position to wait on the next move, added, though, that Fed
officials have made no decision about what to do with rates at
their next policy meeting in late January.
Major U.S. stock indices closed higher, while the dollar
weakened against a basket of currencies and Treasury yields
dropped.
“The 25-basis-point rate cut was widely expected and the
economic projections remain optimistic. I would view this as a
semi-dovish, cautious statement,” said Peter Cardillo, chief
market economist at Spartan Capital Securities. “The markets are
applauding this decision.”
Other analysts pointed to the wide range of policymaker
views on the outlook for rates.
“It’s definitely a hawkish cut, not so much in the fact that
we had two dissenters that wanted to stand pat, but if you look
at the ‘dot plot,’ there were six of them that penciled in no
rate cut at this meeting,” said Art Hogan, chief market
strategist at B. Riley Wealth. The dot plot graphic of Fed
policymaker rate-path projections showed six “dots” at 3.9%,
where the policy rate was before the rate cut on Wednesday.
The decision to lower the benchmark policy rate by a quarter of
a percentage point to the 3.50%-3.75% range drew three dissents,
with Chicago Fed President Austan Goolsbee joining Kansas City
Fed President Jeffrey Schmid in arguing the policy rate should
be left unchanged, and Fed Governor Stephen Miran again
advocating a larger half-percentage-point reduction.
How monetary policy evolves from here, heading into a U.S.
midterm election year that could revolve around the performance
of the economy and with Trump urging sharper rate reductions,
will now hinge on data that is still lagging from the impact of
the 43-day federal government shutdown in October and November.
SOLID 2026 ECONOMIC OUTLOOK
The projections are in a sense optimistic: Interest rates
may remain higher than anticipated, but the economy is seen
growing faster even as inflation falls and the jobless rate also
eases lower.
But the latest policy statement and projections were crafted
without the benefit of recent job and inflation reports, and
instead relied on “available indicators,” which Fed officials
have said include their own internal surveys, community contacts
and private data.
The most recent official data on unemployment and inflation is
for September, and showed the unemployment rate rising to 4.4%
from 4.3%, while the Fed’s preferred measure of inflation also
increased slightly to 2.8% from 2.7%. The Fed has a 2% inflation
target, but the pace of price increases has risen steadily from
2.3% in April, a fact at least partly attributable to the
pass-through of rising import taxes to consumers and a driving
force behind the central bank’s policy divide.
Job and inflation data for November will be released next
week, followed later by a detailed report of economic growth for
the third quarter.
“Available indicators suggest that economic activity has
been expanding at a moderate pace,” the Fed’s policy statement
said. “Job gains have slowed this year, and the unemployment
rate has edged up through September,” it said, dropping a
reference to the jobless rate as “low.”
The updated projections showed a core of six policymakers
preferring no rate cut this year, and seven anticipating no
further cuts in 2026.
The median projection is for one additional
quarter-percentage-point cut in 2027 as well, as inflation
continues to subside towards the central bank’s 2% target.
“Given the lack of consensus on the Committee displayed
today, along with the slow release of traditional economic data,
and the arrival of a new Fed chair early in 2026, we think the
Fed is likely to remain on hold for a while, although continued
softness in some of the labor indicators can certainly bring
another 25-basis-point cut into the mix for January,” said Rick
Rieder, chief investment officer for global fixed income at
BlackRock and one of the five finalists Trump is considering as
a successor to Powell.
Published on December 11, 2025
