Federal Reserve Delivers Third Rate Cut Amid Growing Internal Divisions December 16, 2025

The Federal Reserve delivered its third consecutive interest rate cut, but the decision revealed significant internal tensions within the committee as monetary policymakers navigate an increasingly complex economic landscape.

Rare Three-Way Split Signals Policy Uncertainty

The 9-3 vote marked the first triple dissent since 2019, highlighting a widening divide among Fed officials. Governor Stephen Miran advocated a more aggressive 50-basis-point reduction, while Kansas City Fed President Jeffrey Schmid and Chicago Fed President Austan Goolsbee preferred maintaining current rates. This split underscores the challenging macro environment facing the central bank, with committee members holding divergent views on inflation trajectories and labour market risks.

Labor Market Concerns Take Center Stage

For the first time in this easing cycle, the Federal Open Market Committee explicitly acknowledged rising downside risks to employment. This represents a meaningful shift in the Fed’s labour market assessment, as job growth has decelerated throughout the year and unemployment has edged higher. Recent economic indicators point to softer hiring conditions, even as inflation remains somewhat elevated above the Fed’s target.

Gradual Easing Path Ahead

The December Summary of Economic Projections reinforces expectations of a shallow and measured easing cycle. The median federal funds rate is projected at 3.4% in 2026 and 3.1% in 2027, converging toward a longer-run neutral estimate of 3%. Growth expectations for 2026 were revised upward to 2.3% from the previously projected 1.8%. Unemployment is expected to stabilize around 4.4%-4.5%, while inflation is projected to return to the 2% target by 2028.

Balance Sheet Policy Transition

The Fed officially concluded its quantitative tightening programme, declaring that reserves have reached “ample” levels. Moving forward, the central bank will begin purchasing Treasury bills to maintain adequate reserve levels, marking a shift away from balance-sheet runoff to a neutral reserve-maintenance regime. This operational change aims to stabilise money-markets as non-reserve liabilities continue expanding.

Additionally, the Fed also implemented several technical adjustments, lowering the interest rate on reserve balances to 3.65% and establishing new operational parameters for repo operations to support the updated policy stance.

Frequently Asked Questions

Q: What made this Fed meeting unusual compared to recent decisions?

A: The 9-3 vote featured the first triple dissent since 2019, with Governor Stephen Miran favoring a 50bps cut while Kansas City Fed President Jeffrey Schmid and Chicago Fed President Austan Goolsbee preferred no change, highlighting internal disagreement.

Q: How has the Fed’s view of the labour market changed?

A: The Committee placed clearer emphasis on the fact that downside risks to employment have risen, marking a meaningful shift as job gains have slowed, unemployment has edged higher, and hiring conditions have softened.

Q: What does the Fed’s economic outlook suggest for future rate cuts?

A: The December projections signal a “slow glide” path with the median federal funds rate at 3.4% in 2026 and 3.1% in 2027, indicating a shallow and gradual easing cycle rather than aggressive cutting.

Q: What changes occurred with the Fed’s balance sheet policy?

A: The Fed officially ended quantitative tightening, concluding that reserves have reached “ample” levels, and will begin purchasing T-bills to maintain reserve adequacy rather than continuing balance sheet runoff.

Q: When does the Fed expect inflation to return to target?

A: According to the projections, inflation is expected to return to the 2% target by 2028, while unemployment is projected to remain around 4.4%-4.5%.

Q: What operational changes accompanied the rate decision?

A: The Fed lowered the interest rate on reserve balances to 3.65%, set overnight repo operations at 3.75% and reverse repos at 3.50%, and will continue rolling maturing securities into short-dated bills.

Q: How were growth expectations revised?

A: Growth expectations for 2026 were revised upward to 2.3% from the previously projected 1.8% in September, suggesting a more optimistic economic outlook.

This article has been auto-generated using PhillipGPT. It is based on a report by a Phillip Securities Research analyst.

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