On December 11, 2025, the Federal Reserve announced its third consecutive interest rate cut since September, lowering its benchmark rate by a quarter of a percentage point to a range of 3.5% to 3.75%. The move, anticipated by most market watchers, marks the lowest federal funds rate in three years. Yet, beneath the surface, the decision revealed deep divisions within the Fed’s leadership and highlighted the complex balancing act facing policymakers as they seek to steer the world’s largest economy through persistent inflation and a cooling job market.
Fed Chair Jerome Powell opened the latest meeting with an acknowledgment of the challenges ahead. “There is no risk-free policy path,” he said, emphasizing that the committee’s projections are subject to uncertainty and not a preset plan. According to The Boston Globe, Powell’s remarks underscored the central bank’s struggle to reconcile its two primary mandates: keeping inflation in check and supporting maximum employment.
The latest cut brings the total reduction to 75 basis points since September and 175 basis points since last September. However, the vote was far from unanimous. Three officials opposed the latest move—two preferring to hold rates steady and one, newcomer Stephen Miran, advocating for an even steeper half-point reduction. Six additional officials signaled their silent dissent by omitting the cut from their year-end projections. As The Boston Globe reported, this marks the fourth consecutive meeting without unanimous support, illustrating just how divided the committee has become over the future direction of monetary policy.
Why the discord? Much of it boils down to the conflicting signals coming from the economy. On one hand, inflation remains stubbornly above the Fed’s 2% target, clocking in at 2.8% in September—a figure Powell attributes largely to lingering Trump-era tariffs. “If you get away from tariffs, inflation is in the low two’s,” Powell told reporters. “It is really tariffs that are causing most of the inflation overshoot.” Goods inflation has picked up recently, while disinflation continues in services, creating a patchwork of price pressures that complicate the Fed’s response.
On the other hand, the labor market has unmistakably softened. The September unemployment rate edged up to 4.4%, the highest in four years, and job gains have slowed significantly. Layoffs are rising, hiring has stalled, and labor demand has clearly weakened. “Labor market is cooling a touch more gradually than we thought,” Powell admitted, adding that labor supply has also come down sharply. According to CNN, Powell estimated that employers may have actually shed about 20,000 jobs a month since the spring, a figure that could be revised downward in future government reports.
The Fed’s own projections suggest the jobless rate will hover around current levels through 2026, even as the economy is expected to rebound. Policymakers now forecast gross domestic product to grow by 2.3% in 2026, up from 1.7% this year, partly reflecting pent-up business activity delayed by the federal government shutdown from October through mid-November. Consumer spending has remained resilient, and business investment—particularly in AI data centers—has helped prop up growth. Fiscal policy, Powell noted, is also expected to be supportive in the coming year.
Despite these positive signals, the housing sector remains a notable weak spot. Powell acknowledged that the market faces significant challenges and that a quarter-point rate cut is unlikely to make much of a difference for home affordability. “We have not built enough housing for a long time,” he said, adding that the tools to address the shortage are not within the Fed’s purview.
Wall Street responded to the Fed’s announcement with a mix of caution and optimism. Initially, the NASDAQ dipped by 0.31% while the S&P 500 edged up 0.15% and the Dow gained 0.61%. As the day wore on, investor sentiment improved: the NASDAQ finished up 0.51%, the S&P 500 climbed 0.83%, and the Dow surged 1.30%. Treasury yields fell across the board, with the two-year yield dropping seven basis points to 3.544% and the ten-year yield falling 4.3 basis points to 4.142%. On the currency front, the dollar initially weakened before partially recovering, reflecting the market’s nuanced interpretation of the Fed’s messaging.
For Powell and his colleagues, the road ahead is anything but clear. The committee is now “well positioned to wait to see how the economy evolves,” Powell said, signaling no immediate plans for further rate cuts. “We will get a great deal of data before [the] January meeting,” he explained, stressing the need for patience and careful evaluation of incoming economic reports, especially given potential distortions from the recent government shutdown.
Some officials believe the Fed should pause and assess the impact of earlier cuts, while others see room for additional easing if the job market deteriorates further. “Some people feel we should stop here and wait. Some people feel we should cut once or more,” Powell noted, describing the diverse views within the committee. According to CNN, the median forecast among policymakers is for just one more rate cut next year, though opinions vary widely, with several members favoring no change and others supporting multiple reductions.
Underlying these debates is the ongoing impact of tariffs, which Powell repeatedly cited as a key driver of elevated inflation. He expects the price increases to peak in the first quarter of 2026, assuming no major new levies are introduced. “Tariffs are likely to be one-time price increases,” he said, suggesting that inflation could fall back toward the target as these effects fade.
At the same time, the Fed is closely watching the potential for a positive productivity shock, particularly from advances in artificial intelligence. Powell expressed cautious optimism that higher productivity could allow for stronger economic growth without fueling inflation, though he acknowledged it’s still early days and the impact on layoffs has yet to materialize.
As Powell’s term as chair winds down—set to end in May 2026—the stakes for the Fed’s next moves remain high. President Trump has signaled his intent to appoint a successor who favors even lower rates, with economic adviser Kevin Hassett emerging as a leading candidate. Whoever takes the helm will inherit a central bank grappling with unusually sharp internal divisions and a delicate economic landscape.
For now, the Fed’s message is one of vigilance and flexibility. “Everyone should understand we will deliver 2% inflation,” Powell asserted, reaffirming the central bank’s commitment to its dual mandate. The coming months will test whether careful calibration and open debate can keep the US economy on course through uncharted waters.
