Fed Delivers Widely Anticipated Rate Cut Of 25 Basis Points

The Federal Reserve on Wednesday cut the key borrowing rate by 25 basis points, bringing down the federal funds rate to the 3.5% to 3.75% range, in line with expectations.

The move marks the third reduction in 2025, following similar quarter-point cuts in September and October.

“Job gains have slowed this year, and the unemployment rate has edged up through September. More recent indicators are consistent with these developments. Inflation has moved up since earlier in the year and remains somewhat elevated,” the Fed said in a statement.

The Fed’s “dot plot” projections indicate just one rate cut in 2026, unchanged from its previous forecast.

Moderating Economic Activity

The Federal Open Market Committee (FOMC) said available indicators suggest economic activity is expanding at a moderate pace. Policymakers noted that uncertainty around the outlook remains elevated and said downside risks to employment have increased in recent months.

The committee reaffirmed its goal of achieving maximum employment and 2% inflation over the longer run. Officials said future rate decisions will depend on incoming data, the evolving outlook, and the balance of risks. They emphasized readiness to adjust policy if developments threaten progress toward its goals.

The Fed added that reserve balances have declined to “ample levels” and that it will begin purchasing shorter-term Treasury securities as needed to maintain an adequate supply of reserves.

Three Dissents

The decision passed with support from nine policymakers, including Fed Chair Jerome  Powell and Vice Chair John C. Williams, while three officials voted against the action. Stephen Miran dissented in favor of a 50-basis-point cut, and Austan Goolsbee and Jeffrey Schmid preferred leaving the target range unchanged.

Economic Projections For 2026

Officials upgraded their 2026 median growth projection to 2.3%, from 1.8% in September, and lifted their 2027 and 2028 forecasts by 10 basis points. The longer-run estimate remained unchanged at 1.8%.

The unemployment rate is now projected at 4.4% in 2026, unchanged from the September forecast. Policymakers now see PCE inflation at 2.4% in 2026, down from the previous projection of 2.6%.

The Fed said the New York Desk will begin reserve-management purchases on Dec. 12, following a roughly $40 billion Treasury bill scheduled for release on Dec. 11, with the pace expected to remain elevated into April to offset anticipated increases in non-reserve liabilities before declining to more typical levels.

Meanwhile, U.S. equities rose in Wednesday’s afternoon trade. At the time of writing, the SPDR S&P 500 ETF (SPY) was up 0.3%, the Invesco QQQ Trust ETF (QQQ) gained 0.09%, and the SPDR Dow Jones Industrial Average ETF Trust (DIA) rose 0.7%.

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