The Federal Reserve announced on Wednesday (December 10) the last interest rate decision of 2025, cutting interest rates by one percentage point, bringing the federal benchmark interest rate to between 3.5% and 3.75%. The market dubs this move “hawkish rate cut”.
This marks the third consecutive interest rate cut of 25 basis points by the Federal Reserve in 2025. The decision to cut rates aligns with market expectations. According to the CME Group’s FedWatch tool, the probability of a rate cut by the Federal Reserve in December was 87.6%.
However, the release of the “dot plot” after the meeting showed a high level of uncertainty in future policy direction, as three out of the twelve Federal Reserve officials voted against the decision. This is the first time such a split vote has occurred since September 2019.
The 9-3 voting decision indicates a significant divide among the Federal Open Market Committee (FOMC) officials responsible for interest rate policy. Some members support further rate cuts to mitigate potential softening in the labor market, while others are concerned that additional rate cuts could exacerbate inflationary pressures.
Ahead of this meeting, a term “hawkish rate cut” emerged online, signaling that the Federal Reserve would reduce rates but also cautioning the market not to set overly high expectations for the next rate cut.
Federal Reserve governor Stephen Miran supported a larger rate cut, while Kansas City Fed President Jeffrey Schmid and Chicago Fed President Austan Goolsbee favored keeping rates unchanged.
Within the Federal Reserve, hawks typically focus more on inflation and lean towards maintaining higher rates, while doves are more concerned about supporting the labor market and seek to lower rates.
This marks Miran’s third consecutive dissenting vote and Schmid’s second consecutive dissent. Miran, serving as a temporary governor, will retire in January 2026.
The Federal Reserve’s statement on Wednesday indicated, “In considering further adjustments to the federal funds rate target range – both in magnitude and timing, the Committee will assess carefully the latest data, evolving economic outlook, and risk balance.”
This message is consistent with the Federal Reserve’s statement from December 2024. At that time, the committee hinted at a potential pause in rate cuts until the September 2025 meeting, where the Federal Reserve first approved a rate cut.
As the dust settles from the third consecutive rate cut, market focus now shifts to the Federal Reserve’s future policy direction, as the room for further rate cuts is now very limited.
The dot plot reveals that there will only be one rate cut each in 2026 and 2027 before reaching the long-term target of about 3% for the federal funds rate.
In economic terms, the committee raised its expectations for 2026 Gross Domestic Product (GDP), boosting the September forecast by 0.5 percentage points to 2.3%. The committee continues to anticipate inflation rates staying above the 2% target until 2028.
Despite a lack of official data due to the government shutdown, signs of a slowdown in domestic hiring activities have emerged in the U.S., with sporadic reports of accelerated layoffs. A report released by the U.S. Bureau of Labor Statistics on Tuesday showed little change in job vacancies in October, but a decrease of 218,000 in hiring and an increase of 73,000 in layoffs.
Regarding inflation, the latest data from the Fed’s preferred indicator showed a 2.8% year-on-year inflation rate in September, slightly below Wall Street expectations but still well above the Fed’s 2% target.
Inflation rates remain above the Fed’s target. While most Fed officials suggest that tariffs are temporarily boosting prices, the current gap between inflation levels and the central bank’s target continues to raise concerns among some economists and policymakers.
In addition to the rate decision, the Federal Reserve announced it would resume buying government bonds. Previously, the Fed announced at its October meeting that it would pause the reduction of its balance sheet this month, amidst concerns about overnight funding market pressures.
The Federal Reserve will begin purchasing $40 billion in Treasury securities starting on Friday. The size of purchases is expected to be maintained for “months” before potentially being “substantially reduced.”
Market participants continue to monitor Federal Reserve Chairman Powell’s speeches, worrying about whether he will convey a more cautious message. However, given his upcoming departure as chair in 2026, the weight of his hawkish statements may be discounted.
Meanwhile, investors also keep an eye on Kevin Hassett, a popular successor to Powell and current White House Economic Council Director, for any cautious remarks.
Hassett stated on Tuesday that if he were appointed Federal Reserve Chair, he would not succumb to any potential political pressure for rate cuts. President Trump has expressed a desire for the next chair to focus on rate cuts and plans to conduct final interviews in the coming days.