Fed’s third rate cut of 2025: What’s next?

Statista reported last week on the Federal Reserve’s final rate cut of 2025, one of the bigger financial stories heading into year-end:

“Despite a shutdown-related lack of up-to-date labor market and inflation data, the Federal Open Market Committee decided to cut its key policy rate by 25 basis points on Wednesday. After having kept rates unchanged for the first nine months of 2025, the latest decision marks the third cut in as many meetings, bringing the target range for the federal funds rate to 3.50-3.75 percent for the time being, down from a peak of 5.25-5.50 percent from July 2023 to September 2024.”

TABLE 1: LATEST RATE-CUTTING CYCLE FOR THE FEDERAL RESERVE

Table showing Federal Reserve rate cuts by FOMC meeting date from September 2024 through December 2025 and the resulting federal funds rate range.

Source: Forbes

Related Article: Is there a ‘right’ federal funds rate?

What is the path forward for the fed funds rate?

Yardeni Research offered several observations following the Fed’s announcement, focusing on both policy messaging and the range of views among Fed officials:

“In his prepared remarks at today’s press conference, Fed Chair Jerome Powell rightly observed the obvious: ‘The adjustments to our policy stance since September bring it within a range of plausible estimates of neutral and leave us well positioned to determine the extent and timing of additional adjustments to our policy rate based on the incoming data, the evolving outlook, and the balance of risks.’

“On average, Fed officials believe that the neutral federal funds rate is 3.00%. Two more 25bps rate cuts in 2026 would bring it to neutral. However, monetary policy should remain relatively restrictive until inflation falls to the Fed’s 2.0% target. Powell seems to believe that will happen in 2026. Powell repeated his new ‘well positioned’ mantra a few times, suggesting that the Fed might pause rate cutting for a while. …

“There were three dissenters at the latest FOMC meeting: two opposed to today’s rate cut and one calling for a 50bps cut. According to today’s dot plot, three of the 19 FOMC participants estimate that the FFR is now below their neutral-rate estimates. Seven of them expect no more rate cuts in 2026.

“The Summary of Economic Projections (SEP) shows that the median estimate of the 19 participants is that the FFR will fall to 3.40% next year and 3.10% in 2027.”

Statista also highlighted the divisions reflected in the Fed’s latest projections:

“The Fed’s projections, which are based on the individual opinions of the 19 committee members, signaled a slightly more cautious approach going forward, suggesting just one 25-point cut for 2026 and another one in 2027. However, there is an unusually high degree of dissent within the committee on the right policy path ahead, as both of the Fed’s policy goals—maximum employment and 2 percent inflation—are currently in tension.”

FIGURE 1: FED SIGNALS RATE-CUT CAUTION MOVING FORWARD

Upper limit of U.S. federal funds target rate range*

Chart of the upper limit of the U.S. federal funds target rate from 2014 through projected levels in 2026 and 2027, including recession shading and December 2025 projections.

Sources: Statista, Federal Reserve

Lack of consensus—and more uncertainty

Reactions to the Fed’s December rate cut reflected the growing divide over the appropriate path for monetary policy. President Trump criticized the move as insufficient, arguing the cut should have been twice as large. At the same time, some current, incoming, and non-voting Fed officials preferred a pause, citing inflation concerns, the need for further data, and labor market weakness.

The decision included three dissents among voting members. Fed Governor Stephen Miran voted for a larger 0.5% cut, and Kansas City Fed President Jeffrey Schmid and Chicago Fed President Austan Goolsbee voted to hold rates steady.

Noted economist Mohamed El-Erian, who has often differed with the Fed’s recent policy approach, said in a Fox interview that the 25 basis point cut was “the right thing,” but he wishes the Fed had started cuts earlier and should indicate that it will go further. “They should have started cutting in July,” he said, adding, “My biggest concern about this Fed is the lack of a vision. … They cause much more uncertainty than they should.”

First Trust also weighed in, pointing to both near-term data risks to the Fed’s outlook and longer-term leadership changes:

“Between now and the Fed’s next meeting in late January, there will be a plethora of data on both inflation and employment to clear some of the fog that remains from the government shutdown and associated lack of data releases. Given today’s comments, we expect the Fed to hold at that meeting, but we also believe that a March cut could be on the table if employment data weakens further. Chair Powell’s term ends in May, and regardless of whether he is replaced by National Economic Council head Kevin Hassett or former Fed Governor Kevin Warsh (either would give President Trump a 4-3 majority of appointees), there could be a substantive shift in the tone coming from the Fed with the changing of the guard. From rates to reserves to potential changes to the regional Fed bank system itself, 2026 could be a boisterous year for Fed watchers. We, meanwhile, will be keeping our eyes on what it all means for the M2 money supply, which remains our North Star on inflation.”

Analysis from CNN posed an interesting question: Has a major pillar of the market’s 2025 comeback rally now been removed?

“Wall Street got the rate cut it wanted. But with the Federal Reserve set to take a more cautious approach to trimming interest rates in 2026, investors are now left to wrestle with other concerns that had been put on the back burner while Fed rate cuts were top of mind.

“The Fed’s three consecutive cuts in September, October and December helped markets climb higher and look past nerves about artificial intelligence and uncertainty about tariffs.

“With Fed Chair Jerome Powell telegraphing that rate cuts might be on pause for a while, Wall Street’s focus is turning elsewhere. And uncertainty that had been bubbling under the surface becomes harder to ignore when there isn’t Fed rate-cut optimism to help boost stocks.”