U.S. Federal Reserve Chair Jerome Powell holds a news conference following a two-day meeting of the Federal Open Market Committee (FOMC) at the U.S. Federal Reserve in Washington, DC, U.S., December 10, 2025 Photo Credit: REUTERS/Kevin Lamarque
The Federal Reserve cut interest rates on Wednesday but signaled that borrowing costs are unlikely to fall further in the near term as it awaits clarity on the direction of a labor market that shows signs of weakening, inflation that “remains somewhat elevated” and an economy that it expects to gain momentum next year. New forecasts from policymakers released after the Federal Reserve’s final two-day meeting of 2025 showed a median expectation of a single quarter-percentage point cut next year, the same as in September. But it came with a wide range of estimates that clearly showed the extent of disagreement over where monetary policy should go in 2026 and beyond, in an economy being reshaped by President Donald Trump’s policies and a boom in investment in artificial intelligence. “In considering the size and timing of additional adjustments to the target range for the federal funds rate, the Committee will carefully evaluate incoming data,” the Federal Open Market Committee, which sets the interest rate, said in a policy statement that was amended to include language that has been used in the past to suggest a pause in policy action – an outlook that is at odds with market expectations that are still leaning toward two rate cuts in 2026.
Policymakers’ updated estimates – hampered by incomplete data on the economy after a six-week government shutdown – also showed they expect inflation to slow to about 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 ease worries about possible stagflation that have lingered this year.
The wide disagreement over the appropriate policy for such an environment also highlighted how difficult it can be to reach consensus in a policymaking body facing a leadership transition, with Trump expected to nominate a successor to Fed Chair Jerome Powell in the next few weeks.
THREE POLITICIANS TURN BETWEEN
In a press conference after the meeting, Powell said: “I would like to note that after cutting our policy rate by 75 basis points since September and 175 basis points since last September, the policy rate is now within a broad estimate range of its neutral value, and we are well positioned to wait and see how the economy develops.”
However, Powell, who has repeatedly indicated that he is in a good position to wait for the next move, added that Fed officials had not made a decision on what to do with interest rates at their next policy meeting in late January.
Major U.S. stock indexes closed higher, while the dollar weakened against a basket of currencies and Treasury yields fell.
“The 25 basis point rate cut was widely expected and economic forecasts remain optimistic. I would view this as a semi-dovish, cautious statement,” said Peter Cardillo, chief market economist at Spartan Capital Securities. “The markets welcome this decision.”
Other analysts pointed to the wide range of policymakers’ opinions on the interest rate outlook.
“It’s definitely a more hawkish rate cut, not so much because of the fact that we had two dissenters who wanted to stand firm, but if you look at the ‘dot plot,’ there were six of them who didn’t want a rate cut at this meeting,” said Art Hogan, chief market strategist at B. Riley Wealth. The dot-plot graphic of Fed policymakers’ interest rate forecasts showed six “points” at 3.9%, where the key interest rate was before Wednesday’s rate cut. The decision to cut the federal funds rate by a quarter of a percentage point to the range of 3.50% to 3.75% sparked three disagreements: Chicago Fed President Austan Goolsbee and Kansas City Fed President Jeffrey Schmid argued that the federal funds rate should remain unchanged, and Fed Governor Stephen Miran again advocated a larger cut of half a percentage point.
How monetary policy evolves between now and a U.S. midterm election year that could see economic performance at stake and Trump demanding deeper interest rate cuts will now depend on data that still lags behind the impact of the 43-day government shutdown in October and November.
SOLID ECONOMIC OUTLOOK FOR 2026
The forecasts are somewhat optimistic: interest rates may remain higher than expected, but the economy is expected to grow faster even as inflation falls and the unemployment rate also falls.
But the latest policy statement and forecasts were prepared without relying on current labor market and inflation reports, relying instead on “available indicators,” which Fed officials say include its own internal surveys, community contacts and private data. The latest official data on unemployment and inflation is for September and shows that the unemployment rate rose from 4.3% to 4.4%, while the Fed’s preferred inflation indicator also rose slightly from 2.7% to 2.8%. The Fed has a 2% inflation target, but the pace of price increases has risen steadily from 2.3% in April, at least partly due to the pass-through of rising import taxes to consumers and a driving force behind the central bank’s policy divide.
November’s labor market and inflation data will be released next week, followed later by a detailed report on economic growth for the third quarter.
“Available indicators suggest that economic activity is expanding at a moderate pace,” the Fed’s policy statement said. “Employment gains have slowed this year and the unemployment rate rose slightly through September,” it said, refraining from referring to the unemployment rate as “low.”
The updated forecasts showed that a core of six policymakers do not favor a rate cut this year and seven expect no further rate cuts in 2026.
The median forecast assumes a further cut of a quarter of a percentage point in 2027 as inflation continues to fall toward the central bank’s 2 percent target.
“Given the lack of committee consensus expressed today, the slow release of traditional economic data and the arrival of a new Fed chair in early 2026, we expect the Fed will likely remain on hold for a while longer, although continued weakness in some labor indicators could certainly lead to another 25 basis point cut in January,” said Rick Rieder, chief investment officer of global fixed income at BlackRock and one of the five finalists chosen to replace Trump Powell considers.
Published on December 11, 2025