Update 915 – Third Straight 25 bp Cut
Divides Fed, as Inflation Keeps Climbing
The Fed cut interest rates by 25 basis points, as expected, at the conclusion of its December FOMC meeting this afternoon, in a 9-3 vote. Members confronted both a cooling jobs market and gains in prices. Fed Governor Stephen Miran dissented, seeking a 50 basis-point cut. Kansas City Fed President Jeffrey Schmid and Chicago Fed President Austan Goolsbee also dissented, supporting a pause. For the fourth consecutive meeting, a Trump-appointed Committee member has dissented, supporting rate cuts beyond the preference of the majority.
Powell did not hint at whether the Committee will hold interest rates steady or cut rates once again at their next meeting in January. Next year’s monetary policy decisions will be critical as the Fed seeks to balance competing risks to its dual mandate of stable prices and maximum employment. President Trump will have opportunities to reshape the Fed’s board via nominations throughout 2026, as he continues his ongoing effort to undermine the Fed’s independence.
Best,
Dana
Fed Cuts Rates, Divided on Rate Moves in 2026
The Federal Reserve announced its decision to cut interest rates by 25 basis points for a third consecutive time at the conclusion of the Federal Open Market Committee’s (FOMC) December meeting this afternoon. The broadly anticipated decision comes as Fed officials seek to bolster the weakening labor market, even as inflation rises and marks the FOMC’s final monetary policy decision of the year. The highly contentious decision suggests that the path forward for interest rates is uncertain. Committee members may opt to hold rates steady over the coming months unless they observe significant weakening in the labor market.
Today’s decision was not unanimous and marked the fourth consecutive meeting in which at least one FOMC member dissented. Such dissents were historically rare as FOMC members kept disagreements internal and agreed to show a unanimous vote, but have become more common in recent decisions. Three members dissented from the majority:
- Fed Governor Stephen Miran, who was appointed by President Trump earlier this year, dissented. Miran supported a 50 basis-point cut instead of a 25 basis-point cut, just as he had at the Committee’s last two meetings in September and October. Miran has chosen not to resign from his position as chair of the White House Council of Economic Advisors, where he directly serves President Trump, who has pressured the Fed to dramatically lower interest rates.
- President of the Federal Reserve Bank of Kansas City Jeffrey Schmid dissented, taking the opposing position that the Committee should instead hold rates steady in an effort to control rising inflation, just as he had at the Committee’s last meeting in October.
- President of the Federal Reserve Bank of Chicago Austan Goolsbee dissented, also voting that the Committee should hold rates steady in the face of rising inflation.
At Federal Reserve Chair Jerome Powell’s press conference following the meeting, he called the decision a “close call.” Powell opted not to hint at whether Committee members were leaning towards a pause or another cut at their next meeting, saying “we haven’t made any decision about January.”
Economic projections released following the meeting highlighted the extent of disagreement over today’s decision. Economic projections are collected from each of the 19 FOMC participants – the seven members of the Fed’s Board of Governors and five presidents of regional Reserve banks who vote on the path forward for interest rates, and the seven non-voting Reserve Bank presidents – at every other FOMC meeting. The projections reflect participants’ expectations of future economic outcomes and appropriate monetary policy, given their assessments of current economic data.
FOMC Participants’ Assessments of Appropriate Monetary Policy: Midpoint of Target Range or Target Level for the Federal Funds Rate (December 10, 2025)
Source: Federal Reserve, Summary of Economic Projections, December 10, 2025
One FOMC participant projected that it would be appropriate to lower interest rates to the 3.25 to 3.5 percent range by the end of this year, an adjustment that would have required cutting rates by 50 basis points instead of 25 basis points at this week’s meeting. Projections are anonymous, but Fed Governor Miran’s dissent supporting a 50 basis-point cut suggests that he is responsible for this projection.
Six FOMC participants projected that it would be appropriate to hold interest rates at the 3.5 to 3.75 percent range by the end of this year. Schmid and Golsbee’s noted dissents supporting such a pause at this week’s meeting suggest that four other participants shared their view, registering their so-called soft dissents to today’s decisions.
The FOMC participants forecast that if the economy continues to evolve as expected, they will opt to cut rates to 3.4 percent by the end of next year, just as they had projected at their meeting in September. FOMC participants also project that the Committee would cut rates to 3.1 percent by the end of 2027. Recent data showing signs of weakening in the labor market has led members to rebalance the Fed’s dual mandate of price stability and maximum employment, even as inflation rises under the weight of the Trump administration’s tariffs.
Rate Cut as Inflation Rises and Labor Market Softens
The FOMC began raising the federal funds rate from near zero in early 2022 in an effort to combat rising pandemic-era inflation. The Fed’s preferred inflation gauge, the personal consumption expenditures (PCE) price index, had risen to a peak of 7.1 percent by mid-2022. The Committee raised rates to the 5.25 to 5.5 percent range in its most aggressive series of rate hikes since the 1980s.
By late last year, inflation had fallen to 2.3 percent, and FOMC members projected inflation would decrease further over the coming year and reach the Fed’s two percent target in the longer run, leading them to cut rates by 1.0 percentage point over their final three meetings of last year. After holding rates steady at the elevated 5.25 to 5.5 percent range, the Committee lowered rates to the 4.25 to 4.5 percent range over its final meetings of 2024.
Inflation did not, in fact, ease as FOMC participants had projected when they began lowering rates late last year. Economic risks remained elevated, including due to the Trump administration’s sweeping tariffs on imports from America’s trading partners across the globe. The Committee has been hesitant to lower interest rates as PCE inflation gradually ticked up over the past months and held rates steady throughout much of this year.
Throughout this interest rate cycle, the labor market was largely seen as resilient, with monthly job gains strong and the unemployment rate near a historic low, but job gains have moderated significantly and the unemployment rate has ticked up. Cooling in the labor market over the prior several months puts the Fed’s dual mandate of stable prices and maximum employment in tension and pushed FOMC members to attempt to balance these competing risks. The Committee lowered rates by 50 basis points late this year, prioritizing addressing the labor market over rising inflation. This afternoon’s 25 basis-point cut brings the federal funds rate to the 3.5 to 3.75 percent range.
PCE inflation rose to 2.8 percent in September, the most recent month for which data is available. FOMC participants now project that PCE inflation will rise to 2.9 percent by the end of this year, then fall to 2.4 percent by the end of next year.
Job gains in September, the most recent month for which data is available, slowed significantly from earlier in the year, with 119,000 nonfarm payroll jobs being added to the economy, and the nation’s unemployment rate ticked up to 4.4 percent, its highest level in years. FOMC participants now project the unemployment rate will rise to 4.5 percent by the end of this year and reach 4.4 percent by the end of next year.
With the tension between the Fed’s dual mandates only projected to increase over the coming year, FOMC members face an increasingly challenging monetary policy environment as they head into 2026.
Decision Comes Ahead of Fed Shifts in 2026
The FOMC’s interest rate decision comes amid President Trump’s ongoing effort to undermine the Fed’s independence as he pressures Committee members to lower interest rates. President Trump has been seeking to secure a majority on the Fed’s Board of Governors to gain influence over traditionally politically insulated monetary policy decisions and will have several opportunities to significantly reshape the board in the coming year.
Trump leveled his latest attack against Fed governors appointed by Democratic presidents in his speech in Pennsylvania last night, during which he claimed “we have to look into” whether appointments to Federal Reserve board positions made by former President Biden were approved by “autopen,” seeming to suggest that the four Fed governors appointed by Democratic presidents could be serving their respective terms illegally. President Trump has repeatedly claimed that documents signed by former President Biden using the autopen could be nullified, though legal experts have noted that there is no way to nullify presidential actions signed by an autopen.
Over the past several months, Trump has repeatedly issued and walked back threats to fire Fed Chair Powell, who refused to support lowering interest rates at his urging earlier this year, instead voting to hold rates steady in an effort to address rising inflation. Powell’s term as chair will end in May, after which President Trump will have the opportunity to select a member of the board to serve as chair for a four-year term. On January 31, Fed Governor Stephen Miran’s term will end, giving Trump the opportunity to nominate a replacement to serve a full fourteen-year term on the Fed’s Board of Governors. Trump could later nominate this governor to serve as chair.
Trump has yet to announce his pick for the next Fed Chair, but has openly acknowledged that he would only select a successor for Powell who is committed to cutting interest rates immediately. Former Fed Governor Kevin Warsh and Director of the National Economic Council Kevin Hassett are reportedly among the leading candidates being considered by the President.
Trump has also attempted to remove Governor Lisa Cook from her position on the board over allegations of mortgage fraud, which Cook has denied. In January, the Supreme Court is set to hear oral arguments in Trump v. Cook – the case brought by Governor Cook against President Trump, challenging the legality of her attempted firing.
It is important to note that monetary policy decisions are not made by the Fed’s board alone, but by the FOMC, which is composed of 12 members – the 7 members of the Board of Governors of the Federal Reserve System and 5 presidents of regional Reserve banks. Therefore, the approaching expirations of the terms of Fed board members and the ongoing attacks against members appointed by Democratic presidents are unlikely to give President Trump the decisive controlling influence he seeks.
Fed Chair Powell and politically independent FOMC members must continue to hold their ground and maintain their independence over the coming year, rather than give in to pressure from President Trump and his senior administration members to lower rates quickly. It is critical that members of Congress on both sides of the aisle defend the independence of the FOMC, particularly given that monetary policy can be a key tool in protecting the economy during periods of stress. The FOMC meets next to determine the fate of interest rates on January 27 and 28.