US Fed Cuts Rates to 3.50-3.75%: Powell Hints at Pause

Introduction: The Fed's Third Cut of 2025

The United States Federal Reserve concluded its final policy meeting of 2025 by delivering a widely anticipated interest rate cut. On December 10, 2025, the Federal Open Market Committee (FOMC) announced a 25-basis-point reduction to its benchmark federal funds rate, bringing the new target range to 3.50% to 3.75%. This decision marked the third consecutive rate cut of the year, following similar moves in September and October. However, the move was not unanimous, revealing a growing divide among policymakers about the appropriate path for monetary policy amid persistent inflation concerns and a cooling labor market. The decision and subsequent commentary from Chair Jerome Powell suggest the central bank may be entering a wait-and-see period.

A Widely Expected Decision

Market participants had largely priced in the quarter-point reduction ahead of the two-day meeting held on December 9-10. According to the CME FedWatch Tool, the probability of a cut stood at nearly 90%, reflecting strong investor conviction. The decision to lower borrowing costs came as policymakers balanced the risks of a slowing economy against inflation that remains above the Fed's 2% target. The cumulative 75 basis points of easing since September 2025 represents a significant policy shift aimed at stabilizing the labor market and supporting economic activity without reigniting price pressures.

Cracks in Consensus: The Dissenting Votes

A notable aspect of the December decision was the clear division within the committee. The vote to lower rates was not unanimous, with nine members voting in favor of the 25-basis-point cut. However, there were three dissents. Two members voted to keep the rate unchanged, arguing that further easing was unnecessary at this stage. Another member advocated for a more aggressive 50-basis-point cut, indicating a belief that the economy required more substantial support. This split underscores the complex economic environment and the differing views on how to best navigate the tension between the Fed's dual mandate of maximum employment and price stability.

Powell's Press Conference: A Cautious Stance

In his post-meeting press conference, Fed Chair Jerome Powell adopted a cautious tone, signaling that the central bank might pause its rate-cutting cycle. He stated that the current policy stance is now "within a broad range of plausible estimates of neutral," suggesting that rates are at a level that neither stimulates nor restricts the economy. Powell emphasized that future decisions would be data-dependent, with the committee carefully evaluating incoming information on inflation and employment. He described the situation as "challenging," with near-term inflation risks tilted to the upside while risks to employment were growing. This language was interpreted by markets as a signal that the bar for another rate cut in the near future, particularly at the January 2026 meeting, is high.

Economic Projections and the Dot Plot

The FOMC also released its updated Summary of Economic Projections (SEP), including the closely watched "dot plot" which maps out individual members' rate expectations. The median projection indicated a continued but gradual easing path. Officials penciled in just one additional quarter-point rate cut for 2026 and another in 2027. This was unchanged from the September projections, reinforcing the message of a patient approach. The committee also updated its economic forecasts, projecting median US GDP growth of 2.3% in 2026, an upward revision from 1.8% previously. The median inflation forecast for 2026 was slightly lowered to 2.4% from 2.6%.

Navigating Inflation and Employment Risks

Chair Powell elaborated on the key factors driving the decision. He noted that while inflation remains elevated, it is showing signs of cooling. He also mentioned that the inflationary impact of tariffs is expected to be a one-time price level adjustment that should fade, particularly in the second half of 2026. On the other side of the mandate, Powell acknowledged that the labor market has been gradually softening and that downside risks to employment have increased. This shifting balance of risks, he explained, made it appropriate to lower the policy rate to provide some insurance against a more significant economic downturn.

Key Takeaways from the FOMC Meeting

Market Reaction: A Relief Rally

Financial markets responded positively to the announcement. Major US stock indices rallied, with the S&P 500 rising 0.8% and the Dow Jones Industrial Average gaining 1.2%. The Nasdaq also saw gains. The market's reaction appeared to be driven by the confirmation of the rate cut and the reassurance that the Fed is not considering rate hikes. The US Dollar Index remained relatively stable, while commodity prices like gold held firm, reflecting expectations of a less restrictive monetary policy environment.

Implications for Global Economies

The Fed's policy decisions have significant ripple effects across the globe, particularly for emerging markets like India. A lower interest rate environment in the US can weaken the dollar, making it more attractive for investors to seek higher yields elsewhere. This could potentially lead to increased foreign capital inflows into Indian equity and debt markets. A more stable or weaker dollar also provides relief to the Indian rupee, which has faced pressure from a strong US currency. The Fed's cautious guidance, however, means global investors will remain watchful of US economic data before making major capital allocation shifts.

What Lies Ahead for Monetary Policy

Looking ahead, the Federal Reserve has positioned itself for a period of observation. The next FOMC meeting is scheduled for January 27-28, 2026. Given Powell's commentary, most analysts believe the committee will hold rates steady at that meeting unless there is a significant deterioration in economic data. The focus will remain on incoming reports on inflation, wage growth, and the labor market to guide the Fed's next steps. With Powell's term as chair set to be a topic of discussion in mid-2026, the central bank's leadership and policy direction will be a key theme for the year.

Conclusion

The Federal Reserve's December 2025 decision to cut rates for the third time was a move to support a slowing economy while still keeping an eye on inflation. The dissent within the committee and Chair Jerome Powell's cautious forward guidance highlight the uncertainty ahead. While the rate cut provided a near-term boost to markets, the underlying message is one of patience and data-dependency. The Fed has signaled a likely pause, setting a careful and deliberate tone for monetary policy as it enters 2026.