Most participants agreed that additional rate cuts could be appropriate if inflation continued to ease, but opinions diverged on how quickly and aggressively the Federal Open Market Committee (FOMC) should act. Some officials favored holding rates steady for a time to gauge economic progress, while others saw a need for gradual reductions over the next year. The minutes also included the quarterly Summary of Economic Projections, showing the “dot plot” of officials’ rate expectations, which indicated one further cut in 2026 and potentially one more in 2027.
Economic data in late 2025 showed a mixed picture. GDP surged 4.3% annualized in the third quarter, outperforming estimates, while labor markets grew cautiously with slow hiring but stable layoffs. Inflation showed signs of easing but remained above the Fed’s 2% target. Officials also noted temporary price pressures from tariffs imposed by President Donald Trump, expected to fade in 2026.
The Fed’s next moves will be closely watched. Markets generally expect policymakers to hold rates steady in the near term as incoming data is analyzed. Additionally, four new regional Fed presidents will rotate into voting roles, bringing fresh perspectives that could influence future rate decisions.
FOMC officials divided on future rate policy
The minutes underscored a deep split among Fed officials. While most supported a rate cut in December, several noted that their decision was “finely balanced.” Some argued that the federal funds rate should remain unchanged for a period, citing concerns over whether inflation was sustainably moving toward the 2% target. Others believed a gradual approach, with further cuts over 2026 and 2027, would support economic growth while keeping inflation in check.
Officials also highlighted downside risks to employment and upside risks to inflation. The mixed outlook contributed to a near-even division in sentiment, signaling that future FOMC votes could swing in either direction depending on incoming economic data.
Economic data shows growth amid inflation pressures
Despite the rate cut, the broader U.S. economy showed strong performance. Third-quarter GDP grew 4.3% annualized, exceeding expectations and maintaining momentum from the prior quarter. Labor markets remained steady, with hiring progressing slowly and layoffs not accelerating. Inflation gradually declined but has yet to reach the Fed’s 2% target.Officials noted that tariffs from the Trump administration contributed to temporary price pressures but expected these effects to fade by 2026. The Fed continues to weigh these dynamics carefully, balancing growth support with its inflation mandate.
Fed resumes bond-buying program to stabilize markets
In addition to lowering rates, the FOMC voted to restart its bond-buying program, acquiring $40 billion in short-term Treasury bills monthly. This quantitative easing effort aims to maintain sufficient bank reserves and stabilize short-term funding markets. Without the program, officials warned that reserves could fall below the Fed’s “ample” threshold, potentially disrupting liquidity in the banking system.
The Fed’s balance sheet had previously been reduced by $2.3 trillion to a current $6.6 trillion. Restarting bond purchases signals the committee’s continued commitment to ensuring financial stability while navigating a complex mix of economic risks.
FAQs:
Q: Why did the Federal Reserve cut interest rates in December 2025? A: The Fed lowered the federal funds rate to 3.5%-3.75% by a 9-3 vote. Officials cited easing inflation and the need to support labor markets. Mixed economic data, including slow hiring and strong GDP growth, influenced the decision, while some officials favored holding rates steady temporarily.
Q: What are the Fed’s plans for future rate changes and bond-buying?
A: The December minutes indicate one more rate cut in 2026 and another in 2027, aiming for a near 3% neutral rate. The FOMC also resumed $40 billion monthly Treasury bill purchases to maintain ample bank reserves and stabilize short-term funding markets. Decisions will depend on incoming inflation and employment data.