The Federal Reserve closed out the year with a widely anticipated 25 basis-point interest rate cut Wednesday, lowering the federal funds rate to a range of 4.25%-4.5%.

This marks the lowest level since January 2023 and is the third consecutive reduction in borrowing costs, following a 50-basis-point cut in September and a 25 basis-point move in November.

The decision to lower interest rates was not unanimous, as Cleveland Fed President Beth M. Hammack voted to maintain the target range unchanged at 4.5%-4.75%.

The Fed's statement showed a meaningful language change, with the addition of the words “extent” and “timing” in reference to future policy adjustments. This shift signals a more cautious approach to further rate cuts in 2025.

“In considering the extent and timing of additional adjustments, to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks,” the December Federal Open Market Committee statement said.

Economic Projections Signal Fewer Rate Cuts, Higher Inflation

The Fed’s December dot plot, which illustrates each policymaker’s projected path for interest rates, indicates a median expectation for the federal funds rate to decrease to a midpoint of 3.9% by the end of 2025.

This projection suggests the potential of only two additional 0.25% rate cuts during next year, a meaningful revision from the full percentage point of cuts expected in September.

For 2026, the Fed projects the fed funds rate to fall to a midpoint of 3.4%, up from 2.9% in September.

The Fed materially raised its inflation expectations for 2025, projecting headline Personal Consumption Expenditure inflation at 2.5% compared to 2.1% in September. Core PCE inflation, which excludes volatile food and energy prices, is now forecast to reach 2.5% in 2025, up from the prior estimate of 2.2%.

The Fed reaffirmed that economic activity remains “solid” and said that, despite some easing in labor market conditions, the unemployment rate continues to be low.

Economic growth for 2025 was upwardly revised by 0.1 percentage points from September.

Leading into the December Fed meeting, money markets priced in an 80% probability of a rate pause in January, followed by a 60% likelihood of a rate cut in March.

Overall, CME FedWatch data reflected a 70% probability of at least three rate cuts by the end of 2025.

In contrast, the CFTC-regulated betting platform Kalshi showed a more aggressive outlook, with a 98% chance of four rate reductions next year.

Fed’s December Summary of Economic Projections

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Illustration created using artificial intelligence via Midjourney.