FOMC Reduces Interest Rates at December 2025 Meeting

The Federal Open Market Committee [FOMC] met on Tuesday and Wednesday to discuss developments in the economy, adjust the course of monetary policy, and update their projections. The meeting followed a lengthy government shutdown that delayed key pieces of data they usually use to inform their choices, but the committee was still able to make a decision based on available information.

The Fed evaluated economic risks and determined that threats to the labor market and inflation are both elevated. Due to these dual risks, the committee decided to reduce the Fed Funds Rate to what Fed Chair Jerome Powell described as a neutral policy stance.

FOMC Lowers Fed Funds Rate

The FOMC voted to reduce the Fed Funds Rate by 0.25 percentage points, bringing the target range to 3.50 – 3.75%. This change marked the third reduction in 2025 and brought the Fed Funds Rate to its lowest level since November 2022.

Chair Powell described the current level of the Fed Funds Rate as being on the high end of what could be considered a neutral policy stance. This means policy is neither restrictive, which could harm the labor market but help inflation, nor accommodative, which could help the labor market at the expense of inflation. He went on to say that a neutral stance is the historically acceptable policy position for the Fed when there are simultaneous risks to both unemployment and prices.

The Fed Intends to Buy Short-Term Treasuries

In addition to the interest rate decision, the committee announced their intent to purchase short-term Treasury securities. Chair Powell noted several times that this decision was separate from monetary policy and is not intended to have an impact on their dual mandate to promote stable prices and maximum employment.

The new purchases are not being implemented to have an effect on interest rates. Instead, Chair Powell explained that the Fed Funds Rate rose close to the upper bound of the target range in September, prompting the Fed to engage the overnight repo facility. The new purchases will have a similar effect – raising Fed reserves in order to keep the Fed Funds Rate within the target range.

Updated Economic Projections Were Mostly Stable

The committee released updated projections for GDP, unemployment, and inflation based on economic data received since their last estimates in September. The updated projections were largely stable, but the few changes paint a slightly rosier picture for the economy.

Gross Domestic Product Expected to Rise Next Year

Committee members expect the change in real Gross Domestic Product [GDP] to be 1.7% for 2025 and 2.3% for 2026. Their estimate for 2025 was 0.1 percentage points higher than the previous projection in September, and their 2026 estimate was 0.5 percentage points higher than the prior estimate – the most substantial change to any data point in their projections.

Looking further ahead, the committee expects GDP to rise by 2.0% in 2027, 1.9% in 2028, and settle at an annual growth rate of 1.8% in the long run. These estimates show that the next several years are predicted to bring a stronger economy than we are currently experiencing, though economic growth is expected to taper over the longer term.

Unemployment Expectations Mostly Stable

The committee’s expectations for the labor market were largely stable from the September projections. They show the unemployment rate rising to 4.5% by the end of 2025, then gradually declining to 4.2% by the end of 2028. After that time, the unemployment rate is expected to hold steady at 4.2% in the long run.

The government shutdown throughout October prevented the Bureau of Labor Statistics from collecting the usual data. Therefore, the October report on the labor market will not be released, and the November report is delayed until next week. The most recent data available to the FOMC prior to their meeting was from September, and it showed that the unemployment rate increased by 0.1 percentage points from the previous month to 4.4%.

If the FOMC’s projections prove accurate, the unemployment rate will rise by another 0.1 percentage points by the end of the year. However, Chair Powell noted that official data may be unreliable in the next few months, due to the recent government shutdown.

Inflation Outlook Moderately Improved

High prices have been a constant struggle for many Americans over the past several years, and the latest projections from the FOMC suggest hope for much-needed price stability. The PCE inflation rate is projected to be 2.9% for 2025, then fall to 2.4% by the end of 2026. Prices are expected to further stabilize in 2027 and reach the Fed’s target of 2.0% inflation in 2028.

The current data on inflation and the projected path of price increases is somewhat unique at the current time, due to tariffs. Chair Powell noted that the current rise in goods prices largely reflects tariff-related increases, which have been partially offset by declines in services prices. He estimates that tariff-related price increases should be realized within the next few months if no new tariffs are announced. After that time, there is a strong case for prices to stabilize at the new levels. However, there is also a possibility that price increases could be more widespread or last longer than anticipated. If so, Chair Powell confirmed that the Fed is well positioned to respond and keep price increases manageable.

The following table summarizes the updates to the Fed’s projections from the September release to the December one.

Projected Path of the Fed Funds Rate Unchanged

While economic expectations were adjusted between the September and December meetings, the FOMC’s anticipated monetary policy actions held steady. They expect the Fed Funds Rate to be 3.6% at the end of 2025, which aligns with their latest reduction at the final meeting of the year.

In 2026, they expect to reduce the policy rate to 3.4%, signaling one rate cut at some point throughout the year. Another cut is expected in 2027, which would bring the Fed Funds Rate to 3.1% where it is expected to remain in 2028 before falling to a long-run average of 3.0%.

Fed Funds futures traders largely concur with the Fed’s projections, though there is substantial variation in their estimates. A majority predict stable interest rates at the next meeting in January, followed by a rate cut in April or later in the year.

Projections are a useful tool for business leaders and those basing their investment decisions on the future of interest rates, but they are continuously changing with incoming data. Likewise, the Fed has consistently stated that they are not on a preset course and will continue to make decisions on a meeting-by-meeting basis. For this reason, leaders can continue to monitor incoming data and comments by the Fed to inform their own expectations.

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