Fed Cuts Rates Third Time in 2025; Signals One Again in 2026

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As expected, the US Federal Reserve cut interest rates 25 basis points at the end of its two-day meeting on Wednesday — the last one for the year. It was the central bank’s third cut in 2025, but Fed officials were split on the decision to further drop rates to a range of 3.50%-3.75%. With policymakers dissenting on all sides, some economists are labeling this as the most divided Fed since 2019.

For example, Chicago Fed President Austan Goolsbee and Kansas City Fed President Jeff Schmid reportedly favored holding rates steady, while Fed governor Stephen Miran favored a 50 basis point rate cut. Speaking to the media, Fed Chairman Jerome Powell acknowledged that the decision to lower rates was “a close call,” and that he could “make a case for either side.”

With 2025 inflation still projected by the Fed between 2.9-3.1%, Powell said “It’s really tariffs that’s causing most of the inflation overshoot.”

He explained in prepared remarks: “There is no risk-free path for policy as we navigate this tension between our employment and inflation goals.” He maintained that the Fed has now shifted the balance of its risk-management framework toward the labor market after focusing on its inflation mandate. “A reasonable base case is that the effects of tariffs on inflation will be relatively short-lived, effectively a one-time shift in the price level,” he continued. “Our obligation is to make sure that a one-time increase in the price level does not become an ongoing inflation problem, but with downside risks to employment having risen in recent months, the balance of risks has shifted.”

Another decision not to be overlooked or underestimated: the Fed said it would start buying Treasury securities again. The Fed had noted in October that it would stop such purchases in an effort to pump more liquidity into the economy. But now the central bank has decided, starting Friday, to resume buying $40 billion in Treasury bills — a move viewed by some economists as a backdoor way to lower rates.

The Fed also published its final Summary of Economic Projections (SEP) for December 2025. It includes forecasts from officials on economic growth, inflation, and interest rates through 2028. Median forecasts are shown below. One interest rate cut is still called for in 2026, same as SEP’s September projection.

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