Fed Lowers Again; Fed Funds Target is Now 3.50% to 3.75% - 2025

The Federal Reserve under Fed Chairman Jerome Powell has lowered interest rates by 25 basis points for the third time since September.  The Fed funds rate following the December meeting now stands at a target of 3.50% to 3.75%.

There were three dissents to today's quarter point cut.   Chicago Fed President Austan Goolsbee and Kansas City Fed President Jeff Schmid did not want the Fed to cut.  Steven Miran also dissented, wanting a 50 basis point cut.

The Fed stated that its outlook for inflation and employment has not really changed.   In support of the goals of balancing the risks, the Fed decided to engage in what many are judging to be its final cut for some time.  With the polling over Fed governors indicating either zero or one cut in 2026, it is quite possibly the final cut of Jerome Powell tenure.   

In the near term, the Fed recognizes that there are continued risks to inflation and risks to employment.  While the economy is strong, and predicted to grow faster in 2026 than 2025, the Fed risks being boxed in.  Powell believes that the logical position is to assume that that those risks to inflation are primarily related to tariffs and represent a one-time shock to the system.  But, the US has not experienced tariffs like we are experiencing since World War II so there is clearly some guesswork, especially since government inflation numbers were not available for October or November while the government was closed. In any event, it seems prudent for the Fed not to continue cutting when it next meets on January 28, 2026, even if its ultimate objective is to get short-term rates closer to 2%.

The Fed also implemented QE lite which will involve some purchases of US debt securities on the short end of the curve. According to Powell, this is to ensure that the Fed has the reserves in order to alleviate possible pressures in money markets and enable that rates remain within the Fed remains within its target rate.

The real instability in rates however is at the longer end.  Nothing that the Fed has done has had any impact on the long end of the curve.  The 10-year Treasury began the year at 4.20%, and while it did trade below 4% on eight separate days this year, it is likely to close about where it began the year.  Demand for long-dated US Treasuries is falling off a cliff as the US debt now approaches $39 trillion, and it may get still worse as Europeans chose to place there longer reserves closer to home as a result of the US's abandonment of Ukraine and NATO.  So, in spite of the Federal Reserve's actions, we are seeing no relief for those looking for lower mortgage rates or home equity rates.