FOMC Interest Rates Cut to 3.50 Amid Inflation Concerns

In a closely watched decision, the Federal Reserve’s Federal Open Market Committee (FOMC) voted on Wednesday, December 10, 2025, to cut the federal funds rate by 25 basis points. The policy rate is now set at 3.50%–3.75%, marking the Fed’s latest attempt to deal with high US inflation, slowing economic growth, and global financial uncertainty.

The rate cut, expected by economists and financial markets, comes as price pressures persist and the labor market cools. Investors, policymakers, and central banks worldwide are now focused on Federal Reserve Chairman Jerome Powell’s speech after the meeting, which should explain the Fed’s view on inflation risks, economic conditions, and where rates might go in 2026.

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This 25-basis point reduction shows the Fed’s aim to support growth without reigniting inflation. This balancing act is increasingly difficult as both domestic and international economic conditions change.

Below is an analysis of the decision, the economic context, market reaction, and the future of the Fed’s monetary policy.

Table of Contents

Fed Cuts Rates as Inflation Remains Elevated but Stable

The FOMC’s decision reflects a familiar yet challenging situation:

Inflation remains stubbornly above the Fed’s 2% target, although it has eased since its peaks in 2022–2024.

Core PCE inflation, the Fed’s favoured measure, has stayed between 3.1% and 3.3% for much of the year.

Rising housing costs, persistent wage pressures, and high energy prices have all kept price levels elevated.

Despite these challenges, Fed officials noted gradual progress in reducing inflation and stressed the need to avoid overtightening. Although economic growth has slowed and consumer spending has weakened, the Fed remains cautious.

A senior economist at a major financial institution summed up the concern:

“The Fed is walking a tightrope. Rate cuts are necessary to prevent the economy from stalling, but inflation stability is not fully guaranteed.”

Wednesday’s 25-basis-point cut shows continued easing after the Fed shifted from tightening to easing earlier in 2025.

Why the Fed Cut Rates: Economic Analysis

Slowing Growth in Key Sectors

Several indicators pointed to a cooling economic expansion:

Manufacturing output fell for the third straight month.

Retail sales growth slowed as high borrowing costs affected big-ticket purchases.

Housing activity decreased due to affordability issues, despite some rate relief.

Lower interest rates aim to help cyclical industries and keep liquidity plentiful.

Labor Market Softening

The US labor market, once very strong, has shown clear signs of cooling:

Monthly job gains have dropped sharply.

Unemployment has increased from its post-pandemic lows.

Wage growth has slowed, easing some inflationary pressure.

The Fed noted in its statement that the labor market remains “solid but less tight,” allowing for targeted rate cuts.

Financial Stability Concerns

Recent volatility in global equity and bond markets, along with rising credit stress in the commercial real estate sector, also influenced the Fed’s decision. Lower rates help support asset prices, lower borrowing costs, and stabilise financial conditions.

Global Economic Weakness

International economies, especially in Europe and Asia, are experiencing slower growth, weaker trade volumes, and geopolitical risks. A strong dollar and weaker global demand have created challenges for US exports.

The Fed’s rate cut aligns with a broader trend among global central banks working to support economic stability.

What Powell Is Expected to Address in His Press Conference

Chairman Jerome Powell’s speech will be the main event of the day, with markets looking for clarity on several key points:

Future Rate Cut Path

Investors want to know how many cuts are probable in 2026. If Powell suggests multiple cuts, risk assets may gain. If he expresses a wait-and-see approach, markets may retreat.

The Fed’s dot plot earlier this year indicated the possibility of two more rate cuts, but changing data may impact this outlook.

Inflation Trends and Risks

Powell will likely highlight the importance of staying alert to any resurgence in inflation, particularly in sectors like:

Housing
Healthcare
Energy
Transportation

Markets expect Powell to reaffirm that inflation is still above target but is moving lower.

Balance Sheet Policy

After years of reducing the Fed’s balance sheet, many are waiting for signals on whether the Fed will slow its asset sales in 2026.

Any hint of balance sheet stabilization could significantly affect Treasury yields.

Soft Landing vs. Recession Risk

The biggest question is whether a soft landing is still possible. The Fed still projects modest growth, but overall sentiment has shifted to a more cautious tone.

Powell’s attitude, whether optimistic or reserved, will directly affect equity markets.

Market Reaction to the Rate Cut

Markets reacted predictably ahead of Powell’s comments.

Stocks

Major indices were mixed in early trading:

The S&P 500 fluctuated amid uncertainty.
Tech stocks saw slight gains, helped by expectations of lower borrowing costs.
Financial stocks lagged as profit margins suffered from falling rates.

Bonds

Treasury yields fell, with the 10-year yield declining as investors anticipated further easing.

Dollar

The dollar softened a bit against major currencies, reflecting expectations of a more lenient Fed.

Commodity Markets

Gold prices increased on falling yields, while oil prices remained unstable due to global supply challenges.
Impact on Consumers, Borrowers, and Businesses

The Fed’s rate cut affects the entire economy:

Mortgage Rates

Borrowing costs for homebuyers may decrease further, providing relief from high mortgage rates. Analysts expect gradual declines but caution that housing affordability will likely still be an issue.

Credit Cards and Auto Loans

Credit card rates may drop slightly, although they usually lag behind the Fed’s changes.

Auto financing costs could decline moderately, which might stabilize auto sales.

Small Business Lending

Lower rates could help small businesses obtain cheaper capital, which is vital for hiring, investment, and growth.

Corporate Borrowing

Large companies may benefit from reduced interest costs, supporting capital spending and stock buybacks.

Political and Global Reactions

The Fed’s move is likely to spark political commentary. Some lawmakers have called for faster rate cuts to boost growth, while others warn that easing too quickly could reignite inflation.

Globally, central banks in Europe and Asia might follow with their own cuts to maintain currency stability and support growth. The European Central Bank and Bank of England will closely monitor the effects.

What This Means for 2026 and Beyond

The Fed’s decision shows confidence that the worst of inflation is behind the US. However, it also indicates that economic momentum has cooled more than policymakers would like.

Three Scenarios for 2026

Soft Landing (Most Likely)
Gradual disinflation with modest growth and controlled rate cuts.
Re-acceleration Scenario
Inflation rises unexpectedly, forcing the Fed to change its approach.
Hard Landing
Economic slowdown worsens, leading to several aggressive cuts.

Markets will closely track inflation data, job reports, and global economic trends to predict the Fed’s next steps.

Conclusion: A Pivotal Moment for US Monetary Policy

The FOMC’s 25-basis point rate cut to 3.50%–3.75% highlights the Fed’s attempt to balance ongoing inflation with rising economic risks.

Investors now look to Jerome Powell’s speech for answers to crucial questions:

How committed is the Fed to further easing?
Will inflation decrease quickly enough to allow for more cuts?
Can the economy handle global challenges without slipping into recession?

The next few months will likely determine whether the US economy can achieve a soft landing or face a more difficult path. For now, the Fed has indicated cautious optimism, but markets seek more clarity.

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