Fed Lowers Rates, but Future Cuts Will Require More Evidence of Weakness

The Federal Reserve proceeded with another interest rate cut of 0.25 percentage points at today’s meeting. This was expected by most market participants, with around a 90% implied probability according to the CME FedWatch Tool as of yesterday.

The federal-funds rate now stands at a target range of 3.50%-3.75%. Altogether, the Fed has cut by 1.75 percentage points since September 2024 (1 point in autumn 2024 and 0.75 points this year). Prior to that, the policy rate had been quite elevated at 5.25%-5.50% from July 2023 to September 2024. While the Fed’s rate has come down, it’s still significantly above the pre-pandemic (2017-19) average of 1.7%.

This meeting was originally supposed to be a nail-biter. As recently as mid-November, the implied probability of a rate cut had been below 50%. Then several key members of the Federal Open Market Committee telegraphed that they would be supporting a cut. The meeting’s outcome ended up being unclimactic.

The Fed Likely to Hold Rates Steady in January

The Fed’s official statement preserved language from the prior meeting noting that “downside risks to employment rose in recent months.” There is heightened uncertainty about the economy and labor markets, compounded by the lingering dearth of data caused by October’s government shutdown. Given the focus on downside risks, that uncertainty supported this rate cut. Core personal expenditure inflation is still slightly elevated at 2.8% year over year as of September, but much of the excess is due to tariffs and should ultimately fade.

Still, the decision was not without dissent, with two of the 12 FOMC members voting against changing rates. That’s up from one such dissent in November. The ranks of the hawks are growing. The federal-funds rate is now only about 0.5 percentage points above the 3.0% “longer-run” (or “neutral”) level expected by the median FOMC member. Thus, most committee members no longer judge monetary policy to be heavily restrictive. Powell stated that “the federal-funds rate is now within a broad range of estimates of its neutral value.” All of this is likely setting the Fed up to skip cutting rates during its next meeting in January. Renewed cutting at the subsequent meeting in March will require that the economic data signals a need for it.

Fed Shows Continued Optimism on Inflation

The Fed issued updated economic projections which were little changed from what it said at its last meeting. Indeed, they aren’t much changed from a year ago, despite the unexpected developments in tariffs, the labor market, and artificial intelligence this year. On net, economic conditions (especially monetary policy) have generally played out in line with the Fed’s expectations. Tariffs and other factors caused GDP growth to be a bit lower than expected and inflation a bit higher.

Still, the Fed has maintained its view that inflation will come down to its 2.0% target by 2027 while unemployment remains subdued in the 4.2%-4.3% range. The Fed still expects a rate range of 3.25%-3.50% by the end of 2026 (meaning it makes one additional cut that year), a rate of 3.00%-3.25% by the end of 2027 (one further cut that year), and then holding steady. All this is in line with the central bank’s predictions a year ago.

		Federal Funds Rate: Historical Data and FOMC Projections

		Each dot represents one FOMC member’s federal funds rate forecast.

Source: Federal Reserve. Data as of Dec. 10, 2025.

According with this consistency, the 10-year Treasury yield was mostly confined a range of 4.0%-4.5% in 2025, exhibiting far less movement than we’ve seen in previous years. (There was a dramatic drop in yields over 2019-20, along with the huge jump over 2022-23.)