Federal Reserve Cuts Interest Rate Amid Inflation Concerns and Labor Market Weakness

On December 10, 2025, the Federal Reserve reduced its benchmark interest rate by 0.25 percentage points, setting the federal funds rate target between 3.50% and 3.75%. This marks the third consecutive rate cut this year, bringing the rate to its lowest level in nearly three years. The decision reflects the central bank's response to persistent inflation and a weakening labor market, while also highlighting internal divisions and signaling a more cautious approach to future monetary policy.

The Federal Open Market Committee (FOMC) exhibited notable internal divisions regarding this decision. While the median projection among policymakers suggests one additional rate cut in 2026, opinions varied significantly:

• Some members advocated for multiple cuts.
• Others preferred no further changes.
• Three members anticipated a rate hike.

This divergence underscores the complexity of the current economic landscape and the challenges in formulating a unified monetary policy.

The Fed's cautious stance is influenced by mixed economic indicators:

• Inflation: Remains persistent at 2.8%, exceeding the Fed's 2% target.
• Labor Market: Shows signs of weakening, with unemployment rising to 4.4% over the past three months.

Additionally, the upcoming conclusion of Chair Jerome Powell's term in May 2026 introduces potential changes in leadership, which could further impact future monetary policy decisions.

Following the rate cut announcement, U.S. stock markets edged closer to record highs:

• S&P 500: Rose 0.4%.
• Dow Jones Industrial Average: Gained 386 points (0.8%).
• Nasdaq Composite: Added 0.1%.

Treasury yields dipped, reflecting shifting rate expectations:

• 10-year yield: Dropped to 4.16%.
• 2-year yield: Fell to 3.56%.

These movements indicate investor optimism tempered by caution regarding future Fed actions.

Federal Reserve Chairman Jerome Powell emphasized the Fed's flexible, data-dependent approach:

"The U.S. interest rate policy is currently well-positioned to adapt to future economic developments."

He reiterated that monetary policy decisions will be made on a meeting-by-meeting basis, avoiding explicit guidance on potential future rate cuts.

The Federal Reserve's implementation note outlined specific actions to maintain the federal funds rate within the new target range:

• Interest on Reserve Balances: Lowered to 3.65%, effective December 11, 2025.
• Open Market Operations: Directed to undertake operations as necessary to maintain the federal funds rate in the target range.
• Standing Overnight Repurchase Agreement Operations: Conducted at a rate of 3.75%.
• Standing Overnight Reverse Repurchase Agreement Operations: Offered at a rate of 3.5% with a per-counterparty limit of $160 billion per day.
• Securities Purchases: Increased holdings of securities through purchases of Treasury bills and, if needed, other Treasury securities with remaining maturities of 3 years or less to maintain an ample level of reserves.
• Reinvestment Policy: Rolled over at auction all principal payments from the Federal Reserve's holdings of Treasury securities and reinvested all principal payments from agency securities into Treasury bills.

This rate cut is the third in 2025, following reductions in September and October. The Fed's approach reflects a shift from the rate hikes observed in previous years, aiming to balance economic growth with inflation control.

The Federal Reserve's recent rate cut underscores the delicate balancing act the central bank faces in managing inflation and unemployment amidst internal divisions. Investor reactions suggest cautious optimism, but the impending leadership transition and evolving economic indicators add layers of uncertainty to the Fed's future policy trajectory.