Federal Reserve Reduces Rates Amid Economic Uncertainty

On December 10, 2025, the Federal Reserve's Federal Open Market Committee (FOMC) announced a 25 basis point reduction in the federal funds rate, setting a new target range of 3.50% to 3.75%. This marks the third rate cut this year, following similar reductions in September and October, as the Fed seeks to balance economic growth with inflation control amid a cooling labor market.

The decision was not unanimous, highlighting internal divisions within the FOMC. Jeffrey Schmid, President of the Federal Reserve Bank of Kansas City, and Austan Goolsbee, President of the Federal Reserve Bank of Chicago, voted to maintain the existing rate, expressing concerns about potential inflationary pressures. Conversely, Stephen Miran, a recent appointee to the Board of Governors, advocated for a more aggressive 50 basis point cut, citing signs of economic slowdown. Such public disagreement among FOMC members is uncommon and signals uncertainty about the economic path ahead.

The FOMC's Summary of Economic Projections (SEP), released alongside the rate decision, provides updated forecasts:

• Real GDP Growth: Projected at 1.7% for 2025, increasing to 2.3% in 2026, and stabilizing around 2.0% in subsequent years.

• Unemployment Rate: Expected to remain steady at 4.5% in 2025, slightly decreasing to 4.4% in 2026, and further to 4.2% by 2027.

• Inflation (Core PCE): Forecasted to decrease from 3.0% in 2025 to 2.5% in 2026, reaching the 2.0% target by 2028.

These projections suggest a cautiously optimistic outlook, with expectations of moderate growth and controlled inflation.

Market reactions to the rate cut have been mixed. Major equity indices showed modest gains, reflecting investor confidence in the Fed's supportive stance. Yields on long-term Treasury bonds remained relatively stable, indicating that the rate cut was largely anticipated. The U.S. dollar experienced slight depreciation against major currencies, as lower interest rates typically reduce the currency's attractiveness to investors.

President Donald Trump expressed satisfaction with the rate cut but advocated for more aggressive reductions. White House spokeswoman Karoline Leavitt stated, "The President believes additional reductions are necessary to bolster economic growth." This stance underscores ongoing tensions between the administration and the Federal Reserve regarding monetary policy.

This rate cut is the third in 2025, following similar reductions in September and October. Historically, such consecutive cuts indicate a proactive approach to sustaining economic expansion amid potential downturns. Looking ahead, the FOMC's projections suggest a cautious approach, with only one additional cut anticipated in 2026 and another in 2027, signaling a higher threshold for further easing.

In a related move, the Federal Reserve announced it would begin purchasing short-dated Treasury bills starting December 12 as a technical measure to manage market liquidity and maintain effective control of interest rates. The initial purchase phase will amount to approximately $40 billion and is expected to remain elevated for several months due to projected increases in non-reserve liabilities in April. Fed Chair Jerome Powell emphasized that the renewed bond purchases are not a shift in monetary policy but a strategy to ensure ample reserves.

The Federal Reserve's recent actions reflect its ongoing efforts to navigate a complex economic landscape, balancing the need to support growth with the imperative to control inflation. The internal dissent within the FOMC and the political pressures from the administration add layers of complexity to the Fed's decision-making process. As the economic outlook remains uncertain, the Federal Reserve's policies will continue to be closely scrutinized by markets and policymakers alike.