The Federal Reserve delivered a quarter-point rate cut on December 10, 2025, citing slowing job growth, a softer labor market, and renewed upward pressure on inflation. Policymakers characterized economic activity as expanding “at a moderate pace,” while acknowledging that uncertainty around the outlook has increased and downside risks to employment have risen in recent months.
Fed Responds to Changing Risk Dynamics
The decision lowers the federal funds rate to 3.50%–3.75%, marking a shift toward easing after a year defined by stagnating labor conditions and uneven inflation progress. While inflation has picked up since earlier in the year, the Committee emphasized that achieving maximum employment remains a central priority as job gains continue to weaken and unemployment edges higher.
The statement highlighted that the Fed will weigh future adjustments based on incoming data, the evolving outlook, and the balance of risks. Officials underscored their commitment to returning inflation to 2% over time while supporting labor market stability.
Operational Moves Accompany the Rate Cut
Alongside the policy rate adjustment, the Board of Governors approved several operational steps to reinforce the Committee’s stance:
- The interest rate on reserve balances was reduced to 3.65%, effective December 11.
- Overnight repo operations will run at 3.75%, while reverse repo operations will be offered at 3.50%, with a per-counterparty limit of $160 billion.
- The Fed will begin purchasing shorter-term Treasury bills, and if necessary, additional securities with maturities of up to three years to ensure reserves remain ample.
- All principal payments from Treasury and agency holdings will continue to be reinvested into Treasury bills.
These measures collectively support liquidity conditions while anchoring the new rate target.
Rising Dissent Highlights Divided Views
This meeting revealed wider internal disagreement than earlier in the year. Three members voted against the Committee’s decision:
- Stephen Miran favored a larger 50-basis-point cut.
- Austan Goolsbee and Jeffrey Schmid preferred no change to rates.
Despite dissent, the majority, including Chair Jerome Powell and Vice Chair John Williams, supported the 25-basis-point reduction as a balanced response to current risks.
Looking Ahead
While policymakers describe inflation as still elevated, the statement places heavier emphasis on labor-market softening and broader uncertainty. With the Fed signaling readiness to adjust policy again if conditions deteriorate, attention now shifts to incoming employment data, inflation expectations, and signs of financial or international strain.
The December decision positions the central bank at a new crossroads: easing policy to cushion slowing momentum, while remaining vigilant to prevent inflation from re-accelerating.
