The Federal Reserve’s decision to cut interest rates on December 10, 2025, has ignited debate not only among policymakers but also across financial markets and the broader public. With the U.S. economy at what Chair Jerome Powell described as a “very unusual” crossroads, the move highlights deep divisions within the Fed and raises questions about the path ahead for inflation, employment, and monetary policy.
At the heart of the issue is a rare combination of economic forces. According to Fortune, Powell explained that the U.S. is experiencing tariff-driven goods inflation alongside a labor market that may be weaker than official statistics suggest. The Federal Open Market Committee (FOMC) reduced its baseline interest rate by 0.25 percentage points, bringing it down to a range of 3.5% to 3.75%. This marks the third consecutive rate cut, but Powell was careful to frame the move not as a confident shift toward looser policy, but as a defensive measure to prevent further deterioration in the labor market.
“Forty thousand jobs could be negative 20,” Powell admitted, referencing the Fed’s belief that official payroll figures may be overstating job growth by as much as 60,000 per month. This discrepancy, he noted, is not well understood by the public, especially since unemployment claims remain historically low. Economists Mark Zandi and Claudia Sahm told Fortune that this could be giving Americans a false sense of security about the state of the job market. Powell emphasized, “I think a world where job creation is negative … we need to watch that very carefully.”
But the labor market is only part of the story. Inflation remains elevated, yet Powell stressed that most of the overshoot comes from goods categories directly affected by tariffs—rather than domestic overheating. He pointed out that inflation excluding tariff-affected goods is in the low 2% range, while services inflation is cooling and wage pressures are easing. “Neither the labor market nor business surveys suggest a ‘Phillips-curve’ kind of inflation threat,” Powell said, referencing the classic economic theory linking inflation and unemployment. Instead, he described the current inflation as a “one-time price increase” caused by import levies making their way through supply chains, predicting that goods inflation should peak around the first quarter of 2026—assuming no further tariff rounds.
The policy response to these crosscurrents has fractured the FOMC in ways not seen in years. The rate cut was approved by a narrow 9 to 3 vote, with Governor Stephen Miran favoring a steeper 0.5 percentage point reduction, and regional Presidents Jeffrey Schmid (Kansas City) and Austan Goolsbee (Chicago) preferring no cut at all, as reported by Nexstar Media and CNBC. This marked the first time since September 2019 that three FOMC members dissented on a rate move. Additionally, several officials registered what Powell called “soft dissents”—personal projections that diverged from the final vote.
These disagreements underscore the challenge Powell faces in keeping the FOMC united, especially with the economy at what Nexstar Media termed a “foggy crossroads.” The chair’s role, as always, is to guide the committee toward consensus while allowing for robust debate. “Everyone agrees that inflation is too high, and we want it to come down, and agree that the labor market has softened and that there’s further risk. Everyone agrees on that,” Powell said at his Wednesday press conference. “Where the difference is, is how do you weight those risks? And what does your forecast look like?” He added, “The discussions we have are as good as any we’ve had in my 14 years at the Fed. They’re very thoughtful, respectful, and you just have people who have strong views.”
The lack of federal data on employment and inflation for October—due to a government shutdown that shuttered the Bureau of Labor Statistics—complicated the FOMC’s decision-making. As CNBC pointed out, much of the official data has been trickling in late or missing entirely, forcing policymakers to rely on unofficial indicators. These suggest a “low-hire, low-fire” labor market, with employers hesitant both to add to payrolls and to lay off workers. However, Challenger, Gray & Christmas reported that announced layoffs through November topped 1.1 million, hinting at heavier job reductions to come.
Despite these headwinds, Powell and his colleagues struck a cautiously optimistic tone about the future. Economic projections released on December 10 showed inflation falling from 2.9% in 2025 to 2.4% in 2026, and gross domestic product (GDP) growth rising from 1.7% to 2.3%. Powell attributed this outlook to resilient consumer spending and a surge in investment in artificial intelligence (AI) data centers. He suggested that AI could be boosting worker productivity, although not necessarily lowering the jobless rate—a dynamic that could ultimately support both the economy and household incomes.
Financial markets responded positively to the Fed’s decision, with the Dow Jones Industrial Average climbing 500 points and Treasury yields mostly falling. The FOMC’s post-meeting statement, as CNBC highlighted, repurposed language from the previous year, signaling that the committee will “carefully assess incoming data, the evolving outlook, and the balance of risks” before making further adjustments. Powell reiterated, “We are well positioned to wait and see how the economy evolves.”
Looking ahead, the so-called “dot plot” of FOMC officials’ expectations suggests just one more rate cut in 2026 and another in 2027, before the federal funds rate settles around a longer-run target of 3%. Seven officials indicated they want no cuts next year, reflecting ongoing divisions about the right path for monetary policy. Meanwhile, the Fed announced it would resume buying Treasury securities, starting with $40 billion in Treasury bills, to address concerns about pressures in overnight funding markets. Purchases are expected to “remain elevated for a few months” before being “significantly reduced.”
The stakes for the Fed’s leadership are high. Powell, nearing the end of his second term, has just three meetings left before President Donald Trump names a successor. Trump has signaled he will prioritize a candidate who favors lower rates, with National Economic Council Director Kevin Hassett emerging as the leading contender in prediction markets. As CNBC noted, this could mark a shift in how the Fed balances its dual mandate of stable prices and full employment.
For now, Powell maintains that there is “no risk-free path.” With inflation and employment both under threat, the Fed’s current stance is at the “high end” of neutral, allowing policymakers to “wait and see” how the data evolve. As the U.S. economy navigates this complex moment, all eyes remain on the central bank’s next moves—and on the data that will shape them.
