Federal Reserve Cuts Rates 25 BPS to 3.50%–3.75%
Cites Rising Employment Risks
United States December 10, 2025
The Federal Open Market Committee (FOMC) has voted to lower the target range for the federal funds rate by 1/4 percentage point, bringing it to a range of 3-1/2 to 3-3/4 percent. This decision reflects a shift in the central bank’s focus, as policymakers acknowledge that downside risks to employment have risen in recent months.
Economic Rationale: Balancing the Dual Mandate
The Federal Reserve’s decision is driven by a cooling labor market. While economic activity has continued to expand at a moderate pace, job gains have slowed and the unemployment rate edged up through September. At the same time, inflation remains a concern; data indicates that inflation has moved up since earlier in the year and remains “somewhat elevated”.
Despite the lingering inflation, the Committee views the “balance of risks” as having shifted, necessitating a policy adjustment to support their goal of maximum employment while returning inflation to the 2 percent objective.
Operations and Balance Sheet Adjustments
Beyond the headline rate cut, the Federal Reserve is adjusting its balance sheet strategy. The Committee noted that reserve balances have declined to “ample levels.” To maintain this stability, the Fed will initiate purchases of shorter-term Treasury securities—specifically Treasury bills and other securities with maturities of 3 years or less.
Additionally, the Fed will implement the following technical adjustments effective December 11, 2025:
• Interest on Reserve Balances: Lowered to 3.65 percent.
• Primary Credit Rate: Lowered to 3.75 percent.
• Overnight Reverse Repurchase Agreement Rate: Set at an offering rate of 3.5 percent with a daily per-counterparty limit of $160 billion.
Significant Divergence Among Policymakers
The decision was not unanimous, highlighting elevated uncertainty regarding the economic outlook. The vote revealed a three-way split among policymakers:
• The Majority: Chair Jerome Powell and eight other members voted for the 1/4 point cut.
• The Dovish Dissent: Stephen I. Miran voted against the action, preferring a more aggressive 1/2 percentage point cut.
• The Hawkish Dissent: Austan D. Goolsbee and Jeffrey R. Schmid voted against the cut, preferring no change to the target range.
Key Facts Summary
• New Federal Funds Rate: 3.50% to 3.75%.
• Primary Reason for Cut: Downside risks to employment have risen, alongside slowing job gains.
• Inflation Status: Remains “somewhat elevated” and has moved up since earlier in the year.
• Balance Sheet Action: The Fed will begin purchasing Treasury bills and securities with maturities under 3 years to maintain ample reserves.
• Voting Split: 9 members voted for the 1/4 point cut; 1 member wanted a larger 1/2 point cut; 2 members wanted to hold rates steady.