Fed’s December 25 BPS Rate Cut a ‘Close Call’ Amid FOMC Division and Conflicting Economic Signals

On December 10, 2025, Federal Reserve Chair Jerome Powell described the Fed’s 25 bps rate cut (to 3.5-3.75%) as a “close call,” noting a case could be made for either policy direction [5]. This third annual cut came amid a deeply divided FOMC meeting: 3 members dissented (Austan Goolsbee and Lisa Schmid favored holding rates steady, while Michelle Miran pushed for a 50 bps cut), the highest dissent count since 2019 [1][2]. Six additional FOMC participants were “soft dissents” who would not have supported the cut [1].

The decision unfolded against conflicting economic signals: November ADP private sector jobs fell by 32,000 [3], with unemployment expected to rise to 4.5% (a near four-year high), while inflation remained above the Fed’s 2% target (2.8% in September via PCE gauge [4]). A government shutdown delayed critical economic data, complicating data-dependent policy formulation [1].

The FOMC’s dot plot projected only one more 25 bps cut in 2026, followed by another in 2027, with rates settling at a long-term neutral 3% [1]. The committee also raised its 2026 GDP growth forecast to 2.3% (up 0.5 percentage points), signaling optimism about economic resilience [1]. Separately, the Fed announced $40 billion monthly short-term bill purchases—a technical measure to stabilize funding markets, not quantitative easing [1].

Market reactions were positive: Dow Jones +1.02%, S&P 500 +0.78%, NASDAQ +0.50% [0]. The 10-year Treasury yield fell 0.33% to 4.19%, though the decline was moderate due to the dot plot’s cautious easing projections [0].

1. FOMC Division Epitomizes Policy Dilemma
   : High dissent reflects tension between supporting a weakening labor market and containing persistent inflation—exacerbated by delayed data from the government shutdown. Powell’s “close call” comment highlights this uncertainty.
2. Cautious Dot Plot Defies Market Expectations
   : Despite 90% pre-meeting market pricing for the 25 bps cut [2], the dot plot’s limited 2026 easing projection shows the Fed prioritizing inflation control. Positive market reactions stemmed from the upbeat GDP forecast offsetting slower easing concerns.
3. Technical Measures as Stealth Easing
   : While framed as a funding market stabilization tool, $40 billion monthly bill purchases may be interpreted by markets as “stealth easing” supporting risk assets [1].
4. Fed Chair Transition Adds Volatility Risk
   : Powell’s term ends in May 2026, and the new chair appointment introduces uncertainty about future policy direction, which could roil markets.

• Data Uncertainty
  : Delayed jobs and inflation data from the shutdown hinder the Fed’s ability to assess economic trajectory [1].
• Inflation Persistence
  : Sticky inflation above 2% could force policy reversal, roiling markets [4].
• Leadership Transition Volatility
  : A new Fed chair may shift policy priorities, creating investor uncertainty [1].
• Dissent-Driven Instability
  : A divided FOMC could provide inconsistent guidance, confusing markets [1].

• Lower Borrowing Costs
  : Rate cuts and projected easing reduce consumer/business borrowing costs, supporting spending [1].
• Funding Market Stability
  : Bill purchases mitigate liquidity shortage risks [1].
• Growth Outlook Boost
  : The raised 2026 GDP forecast may enhance investor confidence in economic resilience [0].

This analysis synthesizes the Fed’s December 2025 rate cut decision, including:

• 25 bps cut to 3.5-3.75% (third of the year) with 9-3 dissents
• Dot plot projecting one additional 25 bps cut in 2026
• $40 billion monthly short-term bill purchases for funding market stability
• Positive market reactions (major indices up, 10Y Treasury yield down)
• Economic context: weak ADP jobs, above-target inflation, delayed data due to shutdown
• Powell’s May 2026 term end and upcoming chair appointment

No prescriptive investment recommendations are made; this summary provides objective context for decision-making.