The U.S. Federal Reserve on Wednesday delivered a widely anticipated interest rate cut, trimming its benchmark federal funds rate by 25 basis points to a new target range of 3.50% to 3.75%. However, the move was swiftly met with a mixed reaction on Wall Street, as the central bank’s updated economic projections—the closely watched “dot plot”—signaled a much more cautious path for future easing than markets had priced in.
The decision, the third consecutive reduction in 2025 and the sixth overall since late 2024, came amid growing concern over a cooling labor market and persistent pockets of inflation fueled in part by new tariffs. The vote was notably divisive, underscoring the deep rift within the Federal Open Market Committee (FOMC).
The Cut: Addressing Employment Risks
The quarter-point reduction, led by Chair Jerome Powell, was primarily driven by the Fed’s concern over the “downside risks to employment” and recent stalling in U.S. job growth, issues exacerbated by the recent government shutdown which has clouded the availability of key economic data.
- New Rate: The federal funds rate now stands in the range of 3.50% to 3.75%, the lowest level in nearly three years.
- Borrower Relief: The cumulative effect of the recent cuts is beginning to filter through the economy, offering meaningful relief to borrowers. Mortgage rates and credit card Annual Percentage Rates (APRs) have slightly declined, providing relief to households feeling the pinch of high inflation in other areas like food and housing.
- The Dissension: The vote was far from unanimous, with three officials dissenting. Chicago Fed President Austan Goolsbee and Kansas City Fed President Jeffrey Schmid voted to hold rates unchanged, arguing inflation remains too sticky. Conversely, Fed Governor Stephen Miran voted for a more aggressive half-percentage-point cut (50 basis points).
The ‘Hawkish Cut’: Pumping the Brakes on 2026
The market’s initial positive reaction to the rate cut faded quickly as investors digested the details of the FOMC’s updated projections for the coming year. The committee’s median forecast for the federal funds rate in 2026 was dramatically more restrained than market expectations:
- Fed’s 2026 Forecast: The median projection among officials suggested only one additional 25 basis point rate cut in 2026, keeping the rate close to 3.25% by the end of the year.
- Market Disappointment: Prior to the meeting, futures markets had priced in the expectation of at least two or more rate cuts next year.
- Hawkish Tilt: The revised forecast, coupled with an upward revision to the 2026 GDP growth forecast (to 2.3% from 1.8%) and persistent concern over inflation remaining above the Fed’s 2% target, signaled a “hawkish cut”—a reduction now followed by a strong signal of future caution.
Chair Powell, in his post-meeting press conference, emphasized the Fed is “well positioned to wait and see how the economy evolves from here,” suggesting a high bar for further easing early next year. He specifically noted the “inflationary pressures” stemming from new tariffs as a key factor complicating the balancing act between its dual mandate of maximum employment and price stability.
The December decision ends a tumultuous year for the U.S. central bank, leaving borrowers with some immediate relief but forcing markets to recalibrate their expectations for a slower, more contested easing cycle in 2026.