Fed Steps Down to 3.5%-3.75% as Officials Clash

The Federal Reserve delivered its third consecutive 25-basis-point reduction in December, bringing the federal funds rate down to 3.5%-3.75%, its lowest level since 2022.

The Federal Reserve delivered its third consecutive 25-basis-point reduction in December, bringing the federal funds rate down to 3.5%-3.75%, its lowest level since 2022. The move, expected by markets after similar cuts in September and October, reflects the Fed’s ongoing attempt to balance easing inflation pressures with a labor market that remains resilient. The vote, however, was far from unified, underscoring a growing debate within the committee about how quickly policy should shift.

Projections Hold Steady: One More Cut in 2026

Despite the latest reduction, the Fed’s Summary of Economic Projections showed almost no change to its broader outlook. Officials still see only one additional 25-basis-point cut in 2026, signaling confidence that policy is near its intended setting. The new forecasts show GDP growth rising to 1.7% in 2025 and 2.3% in 2026, alongside slightly softer inflation estimates. PCE inflation is now projected at 2.9% next year, gradually moving closer to the Fed’s 2% objective in the years that follow.

A Rare Split Inside the FOMC

The decision highlighted a sharp divide among policymakers, marking the largest dissent since 2019.

Stephen Miran argued for a deeper 50-basis-point cut, saying the economy could handle faster easing.
Austan Goolsbee and Jeffrey Schmid wanted to keep rates unchanged, warning that inflation remains above target and policy should move more cautiously.

This split displays the challenge of steering monetary policy with mixed economic indicators and lingering uncertainty around the inflation trajectory.

Cautious Optimism Takes Shape

The Fed’s updated projections offer a modestly brighter view of the economy. Growth expectations for the next two years were revised higher, while inflation is seen cooling more meaningfully. The unemployment rate is projected to hold steady at 4.5% in 2025 before slipping slightly in 2026. Charts included in the official projections show most FOMC participants converging around steady improvement in both inflation and labor-market dynamics, with only narrow differences in the medium-term view.

Markets Settle as the Fed Signals Patience

Financial markets had priced in the December cut, but the Fed’s messaging suggests policymakers want to move gradually. Inflation has eased yet remains above target, and officials appear intent on avoiding any shift that could reignite pricing pressures. For traders, the takeaway is clear: the easing cycle continues, but the Fed plans to proceed carefully. Future cuts will depend entirely on the flow of economic data, keeping the central bank flexible as it guides policy into 2026.

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