Federal Reserve policymakers voted to reduce the federal funds rate by 0.25% at its third consecutive meeting as labor concerns again defeated inflation fears in the latest thumb war between U.S. central bankers.
The overnight lending rate for banks ends 2025 in a target range of 3.5% to 3.75%, in line with Fed officials’ September predictions about where it would land.
“Job gains have slowed this year, and the unemployment rate has edged up through September,” the Fed statement read. “More recent indicators are consistent with these developments. Inflation has moved up since earlier in the year and remains somewhat elevated.”
For the first time in six years, the December rate decision produced three formal dissents.
As he did at the past two Federal Open Market Committee (FOMC) meetings, Fed Governor Stephan Miran voted for a jumbo 0.5% reduction to the fed funds rate.
Kansas City Fed President Jeffrey Schmid voted to keep rates unchanged, as he did in October. But this time, Schmid was joined by Chicago Fed President Austan Goolsbee, who had expressed concerns about inflation in public comments since the last Fed meeting.
The Federal Reserve has a dual mandate to maintain stable prices and maximize employment. Job creation and hiring have weakened considerably in 2025, while various measures of inflation have settled near 3%, above the Fed’s stated 2% target.
Hawkish comments from Fed Chair Jerome Powell Powell following a 25-basis-point cut in late October left market-implied odds of a December rate cut at 50-50 less than a month ago, amid a government shutdown-induced data blackout.
“A further reduction of the policy rate at the December meeting is not a foregone conclusion,” the Fed chair said at the time. “In fact, far from it.”
In recent weeks, however, the market’s confidence in a further reduction of the policy rate at the December meeting sharply diverged from policymakers’ caution.
Fueling this expectation were fresh indicators revealing a “low fire, low hire” landscape where job openings remained flat while private payrolls shed 32,000 positions in November. These signs of a cooling labor market provided the rationale for investors to bet on easing despite the Fed’s hesitant rhetoric.
The central bank’s Summary of Economic Projections, released quarterly in conjunction with the December rate decision, indicated a median fed funds rate projection of 3.4% for 2026. That would mean only one rate cut for all of next year based on the current target range of the Fed’s benchmark rate.
But the so-called “dot plot,” which anonymously tracks central bankers’ assessments of the appropriate path of monetary policy, shows a sharper divergence in views compared with September’s quarterly update. While the high end of the participant projection for the fed funds range for year-end 2026 remained at 3.9%, the lower end was reduced to 2.1% from 2.6%.
Besides the 12 voting members of the FOMC, seven additional Fed officials participated in the forward-looking dot plot. In addition to the two formal dissents in favor of holding rates steady, four additional participants indicated support for a pause in rate cuts.
Mike Fratantoni, senior vice president and chief economist at the Mortgage Bankers Association, noted that the “three dissents highlighted just how divided the committee is with respect to future rate cuts.”
“Inflation is well above the Fed’s target, but the job market appears to be softening, even as data to confirm that trend is still delayed due to the recent government shutdown,” Fratantoni wrote in commentary provided to Scotsman Guide. “Thus, there is ammunition for both sides of the debate within the FOMC.”
Lisa Sturtevant, chief economist of multiple listing service Bright MLS, expressed pessimism that the Fed rate cut will flow downstream to longer-dated bond yields that impact mortgage rates.
“Today’s rate cut, which is the third of the year, will translate into lower short-term borrowing costs,” Sturtevant wrote in an analysis. “However, potential homebuyers waiting for lower mortgage rates are going to be disappointed. In fact, rates could actually increase in the coming weeks.”
She elaborated that the divide among Fed policymakers and “concerns about the potential for inflation to reassert itself” could push mortgage rates higher.
