Fed Cuts Rates by 25 Basis Points: The Rate-Cutting Point Shifts as Policy Stance Eases

Decision Summary: Another 25 Basis Point Cut Approved

The Federal Reserve delivered its third consecutive rate cut on December 11, bringing the benchmark federal funds rate to 3.50%-3.75%. The decision passed with a 9-3 vote, reflecting the central bank’s ongoing effort to adjust monetary policy amid mixed economic signals. As a key cutting point in the Fed’s policy cycle, this move signals a continued shift toward easing despite persistent inflationary pressures.

Economic Backdrop: Growth Slows, Unemployment Ticks Higher

The Fed’s statement reflects a nuanced economic picture. While economic activity continues at a moderate pace, the labor market shows signs of softening—job creation has decelerated since earlier in the year, and unemployment has risen from its September lows. Recent data continues to support this trend. Inflation, however, remains stubbornly elevated compared to the beginning of 2024 and sits well above the Fed’s 2% target, creating a balancing act for policymakers.

The Committee acknowledged that uncertainty about the economic outlook remains elevated, positioning this rate cut as a risk-management tool to protect employment gains while inflation gradually moderates.

The Policy Action: Easing With Caution

To address emerging downside risks to employment, the Fed moved to lower its target range for the federal funds rate by 25 basis points to 3.50%-3.75%. This represents the cutting point where the Committee believes current policy stance is appropriate. However, the Fed signaled patience on further moves, noting it will carefully evaluate the latest data, the evolving economic outlook, and the balance of risks before determining the timing and magnitude of additional adjustments.

The Committee also announced it will purchase $40 billion in Treasury bills within 30 days starting December 12 (UTC+8) to maintain ample reserve balances, a move aimed at supporting financial system liquidity and keeping money market conditions stable.

Internal Division: The Dissenting Votes

While nine members supported the 25 basis point cut, three dissented:

• Stephen I. Miran favored a larger move—a 50 basis point cut at this meeting
• Austan D. Goolsbee and Jeffrey R. Schmid preferred to hold rates steady

This three-person dissent underscores ongoing debate within the Fed about whether the cutting cycle should be more aggressive or more cautious. The fact that some members wanted to pause highlights the Committee’s internal differences on how to balance employment and inflation concerns.

What’s Next: The 2026 Outlook

The Fed’s updated dot plot suggests another 25 basis point cut is likely in 2026, though economic data between now and then will determine the actual pace. The Committee remains committed to achieving maximum employment and restoring inflation to its 2% target, but will adjust policy as conditions evolve.

Technical Operations: Repo Rates and Reserve Management

To implement this policy stance, the Fed made several operational adjustments:

• The interest rate on reserve balances was lowered to 3.65%, effective December 11, 2025 (UTC+8)
• The primary credit rate was cut by 25 basis points to 3.75%
• Overnight repo operations are now offered at 3.75%
• Reverse repo operations stand at 3.50% with a $160 billion daily limit per counterparty

These operational moves ensure banks have adequate incentive to lend to each other and that the Fed’s target rate stays within the desired 3.50%-3.75% corridor. The Treasury bill purchases represent a clear signal that the Fed intends to keep reserves ample as it enters a new policy cycle.

What It Means: A Measured Approach to Rate Cuts

The December decision marks a significant cutting point in the Fed’s monetary policy evolution. By moving cautiously while acknowledging downside employment risks, the Fed is attempting to provide insurance against an abrupt labor market slowdown without fully backing away from its inflation-fighting stance. Inflation remains “at a relatively high level,” and the Committee will continue monitoring whether it moves closer to the 2% target before accelerating the pace of cuts.

The path forward depends on incoming economic data—if unemployment rises further or inflation falls faster, additional cuts could come sooner. Conversely, if inflation proves sticky, the Fed may pause the cutting cycle entirely. This flexibility, built into the Committee’s forward guidance, suggests the rate-cutting point has been calibrated with careful consideration of ongoing uncertainties.