Fed interest rate decision December 2025:
The Federal Reserve disagreed Wednesday on what should be the priorities for lowering its key interest rate but signaled a tougher road ahead for further cuts.
The central bank’s Federal Open Market Committee met expectations for a “hawkish cut” by cutting the key overnight borrowing rate by a quarter point to a range of 3.5% to 3.75%.
But the move carried warning signs of where the policy would go next, and included a “no” vote from three members since September 2019.
In the 9 to 3 vote, hawkish and dovish opponents came to the fore again; Gov. Stephen Miran favored a larger half-point reduction, while county chairmen Jeffrey Schmid of Kansas City and Austan Goolsbee of Chicago supported holding the line. Hawks, as the Fed calls them, are generally more concerned about inflation and favor higher rates; Doves, on the other hand, focus on supporting the labor market and want lower rates.
This was the third consecutive “no” vote for Miran, who left the Fed in January, and the second for Schmid. The previous three opposition meetings also featured a 2-1 margin between members clashing between the need for tighter and looser monetary policy.
In the post-meeting rate statement, the language from the FOMC meeting from a year ago was redesigned.
“The Committee will carefully consider incoming data, the evolving outlook, and the balance of risks when considering the scope and timing of additional adjustments to the federal funds rate target range,” the statement said.
The use of the language in December 2024 signaled that the committee was probably done cutting for now. The FOMC subsequently did not approve any reductions until its September 2025 meeting.
Fed Chairman Jerome Powell said at the press conference after the meeting that the interest rate cut put the Fed in a comfortable position regarding interest rates.
“We’re well positioned to wait and see how the economy develops,” Powell said.
With the third consecutive rate cut in place, the focus turns to where the FOMC goes from here, leaving little room for additional cuts.
A closely watched “dot plot” of individual officials’ expectations for interest rates shows just one cut in 2026 and one more cut in 2027 before the federal funds rate reaches the long-term goal of around 3%. Those forecasts were unchanged from the September update, but the scenario reflected divisions within the committee over where interest rates should go.
In addition to the two “no” dovish votes on the rate cut, four other meeting participants who did not vote also recorded “soft dissents” indicating that they disagreed with the decision. Seven officials also said they do not want cuts next year. 19 participants among governors and regional presidents attend FOMC meetings, and 12 of them vote.
On the economy, the committee raised its collective view on gross domestic product growth for 2026, raising its September projection by half a point to 2.3%. The committee continues to expect inflation to remain above the 2% target through 2028.
In terms of inflation, prices remain stubbornly high; The Fed’s preferred gauge puts the annual rate at 2.8% in September, the most recent month for which data is available. While this is well below the peaks of a few years ago, it is still well north of the central bank’s 2% target.
In addition to the interest rate decision, the Fed also announced that it would continue purchasing Treasury bonds after announcing at its October meeting that it would stop the balance sheet flow this month. The move comes amid concerns about pressures on overnight funding markets.
The central bank will start purchasing $40 billion from the Treasury as of Friday. After that point, purchases are expected to “remain high for several months” and then likely “reduce significantly.”
These moves come at a sensitive time for the Fed.
Powell is nearing the end of his second term as president, trying to maintain consensus among policymakers. President Donald Trump has just three meetings left to choose his nominee.
Trump has signaled that he will test his choice as a litmus test by opting for lower interest rates as a barometer rather than adhering to the Fed’s dual mandate of stable prices and full employment. The president told reporters Tuesday evening that he expects to hold an election soon.
Prediction markets are betting that the nominee will be National Economic Council Director Kevin Hassett, who is seen in some corners of financial markets as a Fed chairman who will try to do Trump’s bidding. As of Wednesday morning, Kalshi had a 72% chance of confirming Hassett, while former Fed Governor Kevin Warsh and current Governor Christopher Waller left him far behind.
Fed officials were forced to operate in an environment where much of the official data they used to make decisions was either far behind schedule or missing altogether because of the government shutdown that lasted nearly six weeks until Nov. 12.
The data they see points to a low-hiring, under-hot labor market where employers are reluctant to both increase payrolls and lay off large numbers of workers. However, the latest signs from unofficial data point to more severe job cuts ahead, with job cuts announced by November to exceed 1.1 million, according to job placement company Challenger, Gray & Christmas.
