Fed Update | December 2025 FOMC
- Edward von der Schmidt
- Dec 21, 2025
- 10 min read
The Fed signaled that the Committee will likely hold off on further rate cuts in January as they wait for more information to assess the state and trajectory of the US economy. A lot can change in the weeks and months ahead - policy is not predetermined.
21 DEC 2025
EDWARD VON DER SCHMIDT
Key Takeaways
The Fed intends to pause its rate adjustments until it has a better idea of what is going on in the economy.
The Committee agrees on where we are but not where policy should go next. The next move in rates will almost certainly be lower. The question is how much and when.
Participants have major differences of opinion as to which risks are greater - employment or inflation. Still, labor market risks appear to be increasing as longer-term inflation risks diminish.
With the Fed's goals in tension, slowing down near "neutral" appears to be the safest path while awaiting further clarity (again). There are also some problems that rate cuts cannot solve, which could limit the scope for future easing.
FOMC Statement
There were three major changes to the Federal Open Market Committee (FOMC) statement:
The unemployment rate was no longer characterized as "remain(ing) low" in September, the last data available before this meeting. Note that the Bureau of Labor Statistics (BLS) U3 rate (the primary unemployment reading) has since climbed from 4.4%, to 4.6% in November.
The Fed is now "considering the extent and timing of additional adjustments to the target range for the federal funds rate." The addition of "extent and timing" strongly suggests that a brief pause is probable while the Committee awaits further information.
Reserves have declined from abundant to "ample". The Fed will buy short-term Treasury debt to make sure there is sufficient cash in the banking system to preserve orderly functioning of short-term lending markets (also known as money markets) and to maintain control of its policy rate.
Along with the three dissenting voters, the December FOMC clearly involved an active debate on whether to cut rates further and when to pause. Unemployment is no longer low and risks to labor markets have increased while inflation "remains somewhat elevated".
The Committee's statement indicates that the Fed is balancing competing interests and is prepared to take a break in order to assess where the economy is heading before deciding what to do next.
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Summary of Economic Projections (SEP)
Based on the collection of individual projections, the Committee appeared to feel a bit better about growth and inflation prospects next year, even as they saw slightly greater risks of higher unemployment.
While the 'median voter' projected one additional 25bp cut in 2026 and in 2027, the individual forecasts reveal a large disparity in how much lower rates could go next year. No one expects policy rates to go higher, however.
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Prepared Remarks
Chair Powell's prepared remarks provide useful insight into the Committee's rationale and perspective:
The Fed's economic outlook did not change much between the October and December meetings, but this is in no small part due to the lack of available data. Resilient consumer spending and business investment have been offset by weak housing activity and temporary effects from the government shutdown.
Powell framed a "gradually cooling" labor market as "less dynamic", "somewhat softer", and prone to greater risks. A weakening job market is clearly a growing concern but not yet cause for more dramatic adjustments.
At the same time, inflation has climbed, largely due to the tariffs on goods. The Fed believes that a "reasonable base case" is that these tariff effects "will be relatively short-lived" (the artist formerly known as transitory).
Overall, more precarious labor market conditions have "shifted" the Fed's perceived "balance of risks" even as concerns about inflation linger. Powell described this as a "challenging situation", adding that there was "no risk-free path for policy as we navigate this tension."
The Fed wants to make sure temporary inflation does not become an "ongoing ... problem". The central bank needs this assurance before it will feel comfortable easing policy further to support employment to the extent that the Fed can. According to the Chair, this "calls for ... a balanced approach."
By aggregating recent cuts ("3/4 percentage point over our last three meetings") and describing them as a "further normalization", Chair Powell strongly suggested that this batch of easing has concluded. He reinforced this point by highlighting how policy rates are "within a range of plausible estimates of neutral", i.e., neither accommodative or restrictive. Regardless of what happens at the next meeting, he is communicating that the Fed intends to at least slow down here.
Powell reiterated that the Fed's recent rate cuts "leave us well-positioned to determine the extent and timing of additional adjustments." This is as forward a signal that the Fed can make that a pause is likely. The FOMC will just need to gather more information to make an informed determination about another move lower, which will take time.
That said, context can change quickly. As Powell cautioned, "monetary policy is not on a preset course, and we will make our decisions on a meeting-by-meeting basis." Nothing is guaranteed - every meeting is still live.
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Press Conference
You can learn a great deal from the post-FOMC press conference, especially when important policy shifts are underway. Watching the press conference or reading the full transcript is worthwhile to gauge the Chair's answers in context. I have summarized my observations and included notable excerpts at the end for your convenience.
In so many words, Chair Powell answered the first question by signaling that the Fed intends to hold policy steady until the Committee has more information about the state of the economy and its trajectory. Throughout the Q&A, he offered some variation of "we are well-positioned to determine the extent and timing of additional adjustments" or to "see how the economy evolves" at least seven times. This is 'Fedspeak' for, "We'd like to hold here for a bit and see what's what before doing anything."
Differences of opinion notwithstanding, Chair Powell emphasized that everyone agreed on inflation being too high and labor markets cooling. The debate centered on where the greater risks lie and what should be done about them. Pausing in or near "neutral" policy territory will allow for more time and data to make those assessments. The next rate move is much more likely to be down, not up. The Fed really just needs to wait and see to learn more about what to do next.
Although the Fed's inflation and employment goals are in tension, Powell hinted that labor markets may be weakening more than anticipated and that the one-off base case for tariff-driven inflation appeared increasingly likely. This also strongly suggests that the thrust of future policy will be accommodative.
While the Fed can help to stabilize and support job growth by shifting to less restrictive or more accommodative policy, Powell conceded that it cannot really address certain structural challenges, namely AI's impact on productivity and jobs as well as housing shortages. There's only so much the central bank can do with a singular tool, which may frustrate those seeking greater monetary easing sooner.
For now, the Fed thinks it prudent to wait and see how things go. Given potential technical distortions in upcoming data releases, it may take a few months to determine the appropriate path forward. It would seem that a January hold is most likely - unless the outlook changes materially in the weeks ahead.
Whether the "considering the extent and timing of additional adjustments" phrase "indicate(s) that the Fed is now on hold":
"So, yes, the adjustments since September bring our policy within a broad range of estimates of neutral. And as we noted in our statement today, we are well positioned to determine the extent and timing of additional adjustments based on the incoming data and the evolving outlook and the balance of risks. The new language points out that we'll carefully evaluate that incoming data."
If "risk management phase of rates cuts over":
"We're going to get a great deal of data between now and the January meeting ... we decided, as our framework tells us to do, that when the risks to the two goals become more equal, you should move from a stance that favors really dealing with one of them, in that case inflation, to a more balanced, more neutral setting. And so we did that and we did some cutting ... We've now cut a total of 175 basis points ... we feel like ... we're well positioned to wait and see how the economy evolves from here."
Is there a "much higher bar for cuts in the near term" given dissenting views on the Committee:
"The situation is that our two goals are a bit in tension (...) interestingly, everyone around the table at the FOMC agrees that inflation is too high and we want it to come down, and agrees that the labor market has softened and that there is further risk. Everyone agrees on that. Where the difference is, is how do you weigh those risks and what does your forecast look like and where do ... you think the bigger risk is? ... It's not like the normal situation where everyone agrees on the direction and what to do ... As I've said before a couple times, we're well positioned to wait to see how the economy evolves. We'll just have to see."
Are dissents counterproductive for communications:
"I don't feel that we're at that point at all. I don't. I would say, again, these are good, thoughtful, respectful discussions ... I could make a case for either side. I mean I could make that case. It's a close call ... You've got one tool. You can't do two things at once. So at what pace do you move? How -- what size moves do you make? ... And what's the timing of them? ... it's a very challenging situation. I think we're in a good place to -- as I mentioned, to wait and see how the economy evolves."
Potential for rate hikes:
"I don't think that a rate hike is anybody's base as the next thing ... I'm not hearing that. What you see is some people feel we should stop here and that we're at the right place and just wait. Some people feel like we should cut once or more this year and next year."
Risk of rising unemployment:
"(Policy) will enable the labor market to stabilize or to only kick up one or two more tenths. But we won't see, you know, any kind of a sharper downturn, which we haven't seen any evidence of it at all ... but, as I said, we're well placed to wait and see how that turns out. That is our expectation, but you know, we're going to start to see the data and it'll tell us whether we were right or not."
Deciding to cut in December vs. holding:
"I think you can say that the labor market has continued to cool gradually, maybe just a touch more gradually than we thought ... In terms of inflation, it's come in a touch lower. And I think the evidence is kind of growing that what's happening here is services inflation is coming down and that's offset by increases in goods, and that goods inflation is entirely in sectors where there are tariffs."
Whether staggered rate cuts in the 1990s are a "useful model" for today:
"I don't think it rises to that level ... this is such a unique situation. It's not the 1970s, let's put it that way. But we do have tension between our two goals ... Our framework ... says that, when that's the case, that we try to take a balanced approach ... we look at how far (employment and inflation) are and how long it would take to get each of them back to the goal. And that's a very subjective analysis really ... when they're broadly equally threatened or equally at risk, you should be kind of neutral because, if you're either accommodative or tight, you're favoring one or the other goal ... Now we're in the range of neutral. We're in the high end of the range of neutral, I would say ... We haven't made any decision about January. But, as I've said, we think we're well positioned to wait and see how the economy performs."
Timing of tariff inflation:
"If there are no new tariff announcements ... inflation from goods should peak in the first quarter or so. Right? Or roughly. We haven't been able to predict this with any precision. No one is."
Prioritizing labor market concerns:
"We're trying to keep inflation under control but also support the labor market and strong wages so that people are earning enough money and feeling economically healthy again."
Tolerating above-target inflation for now:
"Everyone should understand ... that we're committed to 2 percent inflation and we will deliver 2 percent inflation. But it's a complicated, unusual, difficult situation where the labor market is also under pressure, where job creation may actually be negative."
Negative job creation:
"It's very difficult to estimate job growth in real time. They don't count everybody. They have a survey. And there's been something of a systematic overcount ... we think that has persisted ... I just think we need to watch that situation very carefully and be in a position where we're not, you know, pushing down on job creation with our policy."
AI impact on jobs:
"In really significant technology and innovation eras, you have seen some jobs destroyed and other jobs made. Ultimately, what's happened for a couple hundred years is, when you get through all that, you have higher productivity, and you have new jobs and there are enough jobs for people. This may be different ... In the past, there's always been more work and higher productivity and incomes have risen. What will happen here, we're going to have to see ... it's certainly not showing up in layoffs yet."
Income and spending disparities among Americans:
"Most of the consumption does happen by people who have more means ... It's a good question how sustainable that is. The best we can do is to have price stability and a strong labor market."
Housing affordability:
"The housing market faces some really significant challenges ... we don't really have the tools to address ... a structural housing shortage."
Inflation risks:
"We think, we estimate, we expect most of us that inflation will be a one-time price increase and then come down. We just came off an experience where inflation turned out to be much more persistent than anyone had expected. Is that going to happen now? ... All across the Committee, people see the picture pretty similarly, but see the risks quite differently. And some people do see the inflation risk. And I wouldn't dismiss that case."
AI affecting productivity:
"I think (AI) makes people who use it more productive. It may make other people have to find other jobs though. So, it could have productivity implications while also having social and labor market implications that we don't have the tools to deal with."
Whether higher productivity implies a higher neutral rate:
"All things equal, yes. But all things aren't equal. There are many, many things pushing in different directions on where the neutral rate would be."
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This is not financial advice and should not be taken as such. The observations and opinions expressed here are protected by copyright and belong to Datum Research LLC. All rights reserved.