Mixed Signals from the Federal Reserve Meeting

A rate cut, but cautious in tone

The Federal Reserve lowered the U.S. interest rate at its final meeting of 2025 by 25 basis points, from 4.00% to 3.75%, marking its lowest level since October 2022. The decision was made by majority rather than unanimous vote, as some members believed the current rate remained appropriate for economic performance and that further cuts could accelerate inflation more rapidly.

The Federal Reserve also revised its economic projections issued in September. Growth forecasts were raised from 1.6% to 1.7% for 2025 and from 1.8% to 2.3% for 2026. Inflation expectations were adjusted higher from 2.9% to 3.0% in 2025, but lowered from 2.6% to 2.4% for 2026, clearly indicating reduced concerns about the impact of this year’s tariff measures on economic performance.

Shift among U.S. monetary policymakers

The dot plot revealed that a majority of members now expect only one rate cut in 2026. However, the U.S. dollar did not benefit from the Fed’s cautious stance because Chair Jerome Powell’s term ends in 2026 and he is expected to be replaced with someone more aligned with President Trump’s preference for lower interest rates.

President Trump’s success in removing Lisa Cook from her position is considered key to securing a pro-Trump majority on the Federal Reserve Board of Governors (five out of seven members), potentially paving the way for more aggressive monetary easing. Even if Trump fails in removing Lisa Cook, the Fed’s projection that inflation will decline to 2.4% in 2026 leaves ample room for policymakers to implement more than one rate cut next year, especially amid weakening U.S. labor market performance.

Better to wait for the data

As a result, the Federal Reserve’s message appeared mixed to the markets. On one hand, the Fed maintained its projection for only a single rate cut in 2026. On the other, it also forecasts declining inflation next year. Consequently, markets opted not to price in a rate cut for January and instead chose to wait for upcoming U.S. labor market and inflation data for October and November next week to gain greater clarity before seriously pricing in a rate cut for March 2026.

It is worth noting that markets are currently pricing in roughly a 47% probability of a 25-basis-point rate cut in March, according to CME Group website.

Federal Reserve Dot Plot – December 2025