Khan Capital | December 2025
Key Takeaways
- The Fed delivered three consecutive 25bp cuts in September, October, and December 2025, bringing the federal funds rate to 3.50-3.75%, after holding steady for eight months.
- Internal dissent reached levels not seen in decades, with the December meeting producing three dissents from opposing directions, while six non-voting members also preferred no cut.
- The longest government shutdown on record forced the Fed to make its October and December decisions without official employment or inflation data.
- The dot plot projects just one more cut in 2026 versus market pricing of two, and the Fed announced resumption of Treasury purchases starting with $40 billion in bills.
- The transition to a new Fed chair in 2026, amid active litigation over the firing of Governor Cook and the installation of a White House adviser as a voting member, represents the most consequential leadership change at the central bank in a decade.
On 10 December 2025, the Federal Reserve cut the federal funds rate by 25 basis points to 3.50-3.75%, the third consecutive quarter-point reduction following September and October. The three cuts mirrored the pattern of late 2024, when the Fed also delivered three consecutive reductions. But the similarity in cadence masked a fundamentally different decision-making environment: the 2025 cuts were made amid rising inflation, a weakening but not recessionary labour market, a government shutdown that deprived the Fed of critical economic data, unprecedented internal dissent from opposing directions, and mounting political pressure from a president who had openly threatened to remove the Fed chair.
Chair Powell’s post-meeting assessment was carefully calibrated: “We’re in the high end of the range of neutral. We haven’t made any decision about January, but we think we’re well positioned to wait and see how the economy performs.” The dot plot projected just one additional cut in 2026 and another in 2027 before the federal funds rate reaches a longer-run target of approximately 3%. The message was clear: the cutting cycle is approaching its endpoint.
| December 2025 SEP | 2025 | 2026 | 2027 | Longer Run |
|---|---|---|---|---|
| Fed Funds Rate (median) | 3.50-3.75% | One cut projected | One more cut | ~3.0% |
| GDP Growth | Moderate pace | 2.3% | 2.3% | – |
| Unemployment | 4.4% (Sep) | 4.4% | – | – |
| Core PCE Inflation | 2.8% (Sep) | 2.5% | Falling toward 2% | 2.0% |
| Dissents | 3 dissents: Miran (wanted 50bp cut), Goolsbee & Schmid (wanted no cut) | |||
The Path to September: Eight Months on Hold
The Fed entered 2025 at 4.25-4.50%, having cut three times in the final quarter of 2024. The initial expectation was that the easing cycle would continue into the new year. Instead, the combination of persistent inflation, tariff-driven price uncertainty, and the need to assess the impact of sweeping policy changes from the incoming Trump administration put the Fed on an extended pause.
From January through August, the FOMC held rates steady at every meeting. The March Summary of Economic Projections told the story of the dilemma: the Committee revised its core inflation forecast upward to 2.8% (from 2.5%) while simultaneously raising its unemployment rate projection to 4.4% (from 4.3%). The dual mandate was pulling in opposite directions.
The hold was not comfortable. In July, Governors Chris Waller and Michelle Bowman dissented in favour of a rate cut, arguing that the labour market warranted pre-emptive action. It was the clearest evidence of a divided Committee.
The September Pivot: Labour Market Tips the Balance
By late summer, the data tilted decisively toward the employment side of the mandate. Monthly job growth from May through September came in below average. The unemployment rate had risen by roughly half a percentage point since the beginning of the year, reaching 4.4%. Powell laid the groundwork for a September cut in his August remarks, signalling that the balance of risks had shifted toward the employment mandate.
The Shutdown Complication: Flying Blind
The October and December meetings were complicated by an extraordinary factor: the longest government shutdown on record had suspended the publication of official economic data. October and November employment reports, inflation readings, and GDP data were unavailable to the Committee at the time of its December decision.
This data blackout forced the Fed to rely on private-sector indicators, regional surveys, and anecdotal evidence from business contacts. The decision to continue cutting through the shutdown reflected a judgement that the risks of pausing outweighed the risks of cutting into uncertainty.
The Dissent Problem: A Committee Pulling Apart
The most striking feature of the 2025 cutting cycle was the unprecedented level of internal disagreement. The December meeting produced three formal dissents: Governor Stephen Miran voted for a larger 50-basis-point cut; Governors Austan Goolsbee and Jeffrey Schmid voted against any cut at all. The previous three-dissent meeting had also featured a split from opposite directions, a phenomenon that had occurred only three times in the previous 35 years. Additionally, six other non-voting members would have preferred not to cut in December.
The dissents reflect a genuine intellectual disagreement about the appropriate response to an economy experiencing both above-target inflation (core PCE at 2.8%) and a deteriorating labour market. The hawks argue that cutting rates while inflation remains elevated risks de-anchoring inflation expectations. The doves argue that the labour market’s deterioration is the more urgent risk and that tariff-driven inflation is a relative price adjustment that monetary policy should “look through.” As Powell noted: “If you get away from tariffs, inflation is in the low twos, so it’s really tariffs that’s causing most of the inflation overshoot.”
Powell’s achievement in forging consensus for three consecutive cuts despite these divisions should not be underestimated. With his term ending in May 2026, the question of whether his successor can maintain this consensus is now a first-order risk for markets.
What the Market Is Misunderstanding
The cutting cycle is effectively over, but the market hasn’t fully accepted it. The dot plot projects just one more cut in 2026 versus market pricing of two, a gap that creates the potential for disappointment. Powell’s language, emphasising that the Fed is “well positioned to wait,” is the clearest signal yet that the bar for further cuts has risen significantly.
The Fed’s independence is being tested in real time. The installation of Miran, a current White House economic adviser, on the Fed board, and his consistent dissent in favour of larger cuts, represents an unprecedented blurring of the line between fiscal and monetary policy authority. The transition to a new chair in 2026 is the most consequential leadership change at the Fed since Powell replaced Yellen in 2018.
The inflation-employment trade-off is real, not transitory. Powell’s characterisation of tariff-driven inflation as likely to “fall out of the data in the second half of 2026” may prove optimistic if tariff rates are maintained or escalated. If inflation remains sticky while the labour market continues to soften, the Fed will face a stagflationary dilemma that cannot be resolved by rate cuts alone.
The balance sheet is quietly expanding again. In addition to the rate cuts, the Fed announced it would resume purchasing Treasury securities, starting with $40 billion in Treasury bills. This marks the end of quantitative tightening and the beginning of a de facto QE programme that is being underappreciated in market commentary focused exclusively on the fed funds rate.
Implications for Investors
The front end of the yield curve offers attractive risk-adjusted returns. With the fed funds rate at 3.50-3.75% and the cutting cycle approaching its endpoint, short-duration fixed income provides meaningful yield with limited rate risk.
Fed leadership transition risk is underpriced. The appointment of a new Fed chair in 2026, potentially one who favours more aggressive rate cuts or less conventional policy approaches, introduces a source of uncertainty that bond and currency markets may wish to hedge against.
The stagflation hedging portfolio deserves consideration. Gold, TIPS, commodities, and short-duration credit provide protection against the scenario where inflation remains above target while economic growth decelerates.
Equity markets may wish to focus on earnings resilience, not rate sensitivity. The era of equities rising on rate cut expectations is fading. With the cutting cycle near its end, stock selection should prioritise companies with durable earnings growth, pricing power, and balance sheet strength.
Conclusion
The Fed’s three consecutive rate cuts to close 2025 were not the confident, consensus-driven easing that characterised the 2024 reductions. They were contentious decisions made amid incomplete data, unprecedented internal dissent, political pressure, and a genuine intellectual disagreement about which side of the dual mandate should take priority. What comes next will depend on a new Fed chair, a divided Committee, and an economic landscape shaped by tariffs, AI, and geopolitical risk that no model can fully capture.
Sources: Federal Reserve FOMC Statement, CNBC, Chase / J.P. Morgan, Fox Business, Yahoo Finance, Advisor Perspectives
Related Reading
The easing cycle began with The Fed Cuts Rates: First Reduction Since 2020. For the hawkish signals that preceded it, see Fed Signals Fewer Cuts in 2025. For how the Fed paused in 2025, see Fed Pauses Rate Cuts: Higher for Longer Returns. For how the rate environment shaped and now threatens the private credit boom, see Private Credit Faces Its First Real Test.
Related Reading: see the Warsh doctrine and the April FOMC.
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