The Federal Reserve cut interest rates by 25 basis points at its December meeting, marking the third rate cut this year. The benchmark rate now stands at 3.50%-3.75%. The updated economic projections show upward revisions to U.S. GDP growth for 2025-2028, while the latest dot plot suggests only one rate cut each in 2026 and 2027. The Fed also announced it will resume purchasing $40 billion in U.S. Treasuries monthly starting December 12, 2025.
The rate cut was widely anticipated, with major U.S. stock indices closing higher. Treasury yields initially surged but later retreated, while the dollar index trended downward.
J.P. Morgan Asset Management highlights five key takeaways from the Fed's decision and Chair Powell's remarks:
1. **Rate Cut Matches Expectations, but Future Path Diverges** The 25bps reduction to 3.50%-3.75% aligned with market consensus. However, divisions emerged among policymakers: Governors Schmid and Goolsbee dissented in favor of no cut, while Governor Milan advocated for a 50bps reduction. Notably, four non-voting members who may gain voting rights next year opposed further easing.
2. **Bond Purchases Slightly Surprise Markets** With liquidity conditions shifting from ample to abundant, the Committee deemed quantitative easing appropriate. The Treasury purchases aim to manage reserve levels rather than signal additional monetary stimulus.
3. **Upward Growth Revisions** The Fed raised its median GDP growth forecasts to 1.7% (2025), 2.3% (2026), 2.0% (2027), and 1.9% (2028), while lowering the 2027 unemployment projection to 4.2%. These adjustments reflect potential benefits from fiscal policies but may reduce urgency for further easing. Inflation forecasts were modestly trimmed, suggesting diminishing tariff impacts.
4. **Hawkish Lean in Dot Plot** The updated projections indicate median rate expectations of 3.375% (2026) and 3.125% (2027-2028), implying just one cut per year through 2027. Significant dispersion exists among members, ranging from calls for no 2026 cuts to one member projecting six reductions.
5. **Powell Maintains Data-Dependent Stance** The Fed Chair acknowledged the challenging trade-off between employment and inflation goals but emphasized flexibility to adjust policy based on evolving conditions. While noting productivity gains could sustain growth, he refrained from attributing them specifically to AI.
With no members signaling rate hikes, the Fed's accommodative tilt may continue supporting risk assets while potentially capping Treasury yields near-term. Investors should maintain balanced equity/fixed-income allocations amid uncertain economic scenarios.
*Source: FOMC statements and projections as of December 10, 2025*
Risk Disclosure: This material does not constitute investment advice or an offer to purchase securities. Investors should conduct independent research and consider risks specific to different asset classes. Views expressed may change and past performance doesn't guarantee future results.
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