US Fed Cuts Rates by 25 bps to 3.50-3.75%: Third Consecutive Cut Amid Inflation Concerns
The US Federal Reserve's Federal Open Market Committee (FOMC), led by Chairman Jerome Powell, cut the benchmark interest rate by 25 basis points to the range of 3.50% to 3.75% on Wednesday, December 10, 2025. This marks the third consecutive rate cut since September 2025, bringing total rate reductions to 75 basis points in 2025, even as inflation remains elevated and the labor market shows signs of weakening.
Rate Cut Details and FOMC Vote
Key Decision Parameters
- Rate reduction: 25 basis points
- New range: 3.50% to 3.75%
- Effective date: December 10, 2025
- Sequential cuts: Third consecutive reduction since September 2025
- 2025 total cuts: 75 basis points cumulative
FOMC Voting Breakdown
The decision revealed divisions within the committee:
- In favor of 25 bps cut: 9 out of 12 members
- Preferred 50 bps cut: 1 member (more aggressive easing)
- Wanted rates unchanged: 2 members (concerned about inflation)
The split vote underscores the challenging trade-offs facing the Fed as it balances inflation concerns against labor market risks.
Official Statement
The FOMC stated:
"In support of its goals and in light of the shift in the balance of risks, the Committee decided to lower the target range for the federal funds rate by 1/4 percentage point to 3-1/2 to 3‑3/4 per cent."
Future Rate Trajectory: Hold or Cut?
Powell's Forward Guidance
Fed Chairman Jerome Powell indicated the central bank is entering a "wait-and-watch mode" for upcoming economic data, with future policy depending on data outcomes:
"I don't think that a rate hike is anybody's base case at this point, I'm not hearing that. What you see is some people feel we should stop here and that we're at the right place and just wait."
Policy Options Ahead
Powell's comments suggest two likely scenarios for 2026:
- Hold rates: Pause at current 3.50-3.75% level to assess data
- Further cuts: Additional reductions if economic conditions warrant
- Rate hikes: Not in consideration according to Powell's dismissal
The Fed's "closer to neutral stance" implies the policy rate is approaching a level that neither stimulates nor restricts economic activity.
Inflation Concerns: Elevated Despite Cuts
Current Inflation Environment
The rate cut occurs against a backdrop of persistently high inflation:
"Job gains have slowed this year, and the unemployment rate has edged up through September. More recent indicators are consistent with these developments. Inflation has moved up since earlier in the year and remains somewhat elevated."
Key Inflation Dynamics
- Trend: Inflation has moved up since earlier in the year
- Current status: Remains somewhat elevated
- Target: Fed's goal remains 2% inflation
- Tariff effects: Rate cut aims to allow inflation to resume downward trend after tariff impacts pass
Dual Mandate Challenge
The Fed reiterated its focus on the dual mandate:
- Maximum employment: Maintaining robust labor market
- Price stability: Bringing inflation to 2% goal
The challenge lies in supporting employment without allowing inflation to become entrenched above target.
Labor Market: Growing Downside Risks
Employment Data Weakening
Recent labor market indicators show deterioration:
- Unemployment rate: Rose to 4.4% in September 2025
- Job additions: Only 119,000 jobs added despite government shutdown
- Trend: Job gains have slowed this year
- Outlook: Unemployment may hit 4.5% by end of 2025
Fed's Acknowledgment of Labor Risks
The FOMC explicitly recognized growing employment concerns:
"The Committee seeks to achieve maximum employment and inflation at the rate of 2 per cent over the longer run. Uncertainty about the economic outlook remains elevated. The Committee is attentive to the risks to both sides of its dual mandate and judges that downside risks to employment rose in recent months."
Policy Response to Labor Weakness
The interest rate easing aims to:
- Stabilize the labor market before further deterioration
- Support employment while inflation moderates
- Provide accommodation as unemployment drifts higher
- Balance risks on both sides of dual mandate
Chairman Powell's warning that unemployment may reach 4.5% by year-end signals the Fed's concern about labor market softening.
Reserve Management: Treasury Purchase Program
Reserve Balance Decline
The Fed addressed an important technical aspect of monetary policy implementation:
"The Committee judges that reserve balances have declined to ample levels and will initiate purchases of shorter-term Treasury securities as needed to maintain an ample supply of reserves on an ongoing basis."
What This Means
- Reserve levels: Have declined but remain at "ample" levels
- Policy response: Fed will purchase short-term Treasury securities
- Objective: Maintain adequate reserves in the banking system
- Mechanism: Ongoing basis, not one-time operation
Technical Significance
This reserve management is separate from monetary policy easing but ensures:
- Smooth functioning of money markets
- Adequate liquidity in the banking system
- Proper transmission of monetary policy
- Stability in short-term funding markets
Market Reactions
US Stock Market Response
Equity markets responded positively to the rate cut:
- Dow Jones: Jumped 1.3%
- S&P 500: Rallied following announcement
- Nasdaq: Advanced on tech-friendly lower rates
Gold Prices
Gold prices remained steady ahead of the Fed decision, with the precious metal benefiting from:
- Lower opportunity cost with reduced rates
- Inflation hedge characteristics
- Safe-haven demand amid economic uncertainty
Political Commentary: Trump's Criticism
Former President Donald Trump criticized the Fed's decision, stating:
- Rate cut should have been 50 basis points, not 25
- US rates "should be lowest in the world"
- Rate cut decision will influence Powell's successor selection
Trump's comments reflect ongoing political pressure on the Fed, though the central bank maintains its independence in policy decisions.
Historical Context: 2025 Rate Cut Cycle
Timeline of Cuts
- December 2024: Rates held unchanged
- September 2025: First rate cut in cycle
- October/November 2025: Second rate cut
- December 2025: Third consecutive cut
- Total reduction: 75 basis points in 2025
Policy Evolution
The rate cutting cycle began after a prolonged period of high rates aimed at combating post-pandemic inflation. The Fed has now shifted to supporting growth and employment as inflation pressures moderate (though remain elevated).
Global Implications
For Emerging Markets
- Capital flows: US rate cuts potentially benefiting emerging market assets
- Currency pressures: Weaker dollar supporting emerging market currencies
- Debt servicing: Reduced dollar borrowing costs
- Monetary policy space: Room for emerging market central banks to cut rates
For India Specifically
- FPI flows: Potential for foreign portfolio investment resumption
- Rupee impact: May stabilize or strengthen against dollar
- RBI policy: Fed cuts provide cover for RBI's own rate reductions
- Export competitiveness: Weaker dollar supporting Indian exporters
Economic Data Focus Ahead
Key Indicators to Watch
The Fed's future decisions will depend heavily on upcoming data:
- Employment reports: Monthly job additions and unemployment rate
- Inflation data: CPI and PCE price indices
- GDP growth: Real economic expansion rate
- Consumer spending: Retail sales and personal consumption
- Wage growth: Average hourly earnings trends
First 2026 Meeting
All eyes will be on:
- Q4 2025 economic data released in early 2026
- Year-end unemployment and inflation figures
- Consumer spending during holiday season
- Business investment trends
These data points will determine whether the Fed pauses or continues cutting rates in early 2026.
Policy Dilemma: Navigating Contradictions
The Fed's Tight Balancing Act
The Fed faces contradictory signals requiring careful navigation:
- Inflation still elevated: Normally argues against rate cuts
- Labor market weakening: Normally argues for rate cuts
- Economic uncertainty high: Argues for cautious approach
- Neutral rate proximity: Argues for slowing pace of cuts
Split Committee Reflects Dilemma
The 9-1-2 vote split shows diverse views:
- Doves (1 member): Want 50 bps cut, prioritize labor market
- Centrists (9 members): Accept 25 bps as balanced approach
- Hawks (2 members): Want pause, prioritize inflation fight
Comparison with Other Central Banks
Diverging Global Monetary Policy
- US Fed: Cutting rates amid elevated inflation
- India RBI: Just cut rates by 25 bps to 5.25% amid ultra-low inflation
- ECB: Also in cutting cycle amid growth concerns
- Bank of Japan: Recently ended negative rates, moving opposite direction
Investment Implications
For Different Asset Classes
Fixed Income
- Treasury yields: Pressure lower on rate cuts
- Credit spreads: Tightening as recession fears ease
- Bond prices: Rising as yields fall
Equities
- Positive overall: Lower rates support valuations
- Growth stocks: Particularly benefited by rate cuts
- Banks: Mixed impact—lower rates pressure margins but improve asset quality
Currencies
- Dollar: Weakening pressure from rate cuts
- Emerging markets: Generally strengthening
- Gold: Benefiting from lower real rates
Outlook and Conclusion
Base Case Scenario
Most likely path forward:
- Near term: Pause at 3.50-3.75% to assess data
- Q1 2026: Possible one more 25 bps cut if labor market weakens further
- Mid-2026: Extended hold as policy reaches neutral
- Rate hikes: Off the table unless inflation resurges dramatically
Key Risks
- Upside risk: Inflation remains sticky, forcing pause sooner than expected
- Downside risk: Labor market deteriorates faster, requiring more aggressive cuts
- Political risk: External pressure on Fed independence
- Global risk: International shocks affecting US economy
Conclusion
The Federal Reserve's third consecutive 25 basis point rate cut to 3.50-3.75% on December 10, 2025, reflects the central bank's delicate balancing act between still-elevated inflation and growing labor market risks. With 75 basis points of cumulative cuts in 2025, the Fed has shifted from aggressive tightening to gradual easing, though the split 9-1-2 vote reveals internal disagreement about the appropriate pace.
Chairman Powell's indication that rate hikes are off the table and future policy will either hold or cut rates suggests the easing cycle may continue, albeit at a slower pace. However, elevated inflation and uncertainty about the economic outlook—reflected in the Fed's own statement—mean the path forward remains highly data-dependent.
The acknowledgment that unemployment may hit 4.5% by year-end and that downside risks to employment have risen signals the Fed's growing concern about labor market deterioration, even as it manages persistent inflation above the 2% target. The technical announcement about purchasing short-term Treasuries to maintain ample reserves adds another dimension to monetary policy management.
For global markets, including India, the Fed's continued rate cutting cycle provides support for risk assets, potential stabilization of the dollar, and room for other central banks to pursue accommodative policies. As all eyes turn to upcoming US economic data releases, the first Fed meeting of 2026 will reveal whether the central bank pauses to assess the impact of 75 basis points of cuts or continues down the path of monetary accommodation in response to labor market weakness.
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