The Federal Reserve cut interest rates by 25 basis points as expected, but three voting members opposed it, still projecting one more rate cut next year and initiating the Reserve Investor Program (RMP) to purchase $40 billion in short-term bonds.

Original author: Li Dan

Original source: Wall Street News

Key points :

• As expected, the Federal Reserve cut interest rates for the third consecutive time by 25 basis points, but for the first time since 2019, it received three votes against the rate decision.
• President Mirjani, Trump's handpicked governor, continued to advocate for a 50-basis-point rate cut. Two regional Fed presidents and four non-voting members supported keeping rates unchanged, effectively resulting in seven people opposing the decision, reportedly the largest disagreement in 37 years.
• The meeting statement reiterated that inflation remains slightly high and that downside risks to employment have increased in recent months, removing the phrase "remains low" from the unemployment rate and stating that it rose slightly as of September.
• The statement added the phrase "the magnitude and timing" of considering further interest rate cuts, which is seen as an indication that the threshold for interest rate cuts is higher.
• The statement said reserves have fallen to an adequate level and that the Fed will begin buying short-term debt this Friday to maintain adequate reserves. The New York Fed plans to buy $40 billion in short-term debt over the next 30 days and expects reserve management purchases (RMP) of short-term debt to remain high in the first quarter of next year.
• The median interest rate forecast remains unchanged from the previous forecast, suggesting that there will be one rate cut each in the next two years. The dot plot's forecast for next year's interest rate is more dovish than the previous one, with one to seven fewer people expecting no rate cut.
• The economic outlook has been revised upward for GDP growth this year and the following three years, while inflation forecasts for this year and next year and unemployment rate forecasts for the year after next have been slightly lowered.
• "New Fed Watch": The Fed has hinted that it may not cut interest rates anytime soon, as internal disagreements over whether to prioritize inflation or employment are "unusually" large.

As expected, the Federal Reserve cut interest rates at its usual pace, but this exposed the biggest division among policymakers in six years, suggesting a slower pace of action next year and a possible inaction in the near term. The Fed also initiated reserve management as anticipated by Wall Street, deciding to buy short-term Treasury bonds at the end of the year to address pressures in the money market.

On Wednesday, December 10th, Eastern Time, the Federal Reserve announced after its FOMC meeting that it had lowered the target range for the federal funds rate from 3.75% to 4.00% to 3.50% to 3.75%. This marks the third consecutive FOMC rate cut by the Fed, with each cut representing a 25 basis point reduction. The total cuts this year amount to 75 basis points, and since September of last year, the current easing cycle has seen a total of 175 basis points in rate cuts.

The dot plot released after the meeting showed that the Federal Reserve's interest rate path projections remained consistent with those released three months ago, still expecting a 25-basis-point rate cut next year. This means that the pace of rate cuts next year will be significantly slower than this year.

This rate cut and the hint of a slower pace of action next year were almost entirely expected by the market. By Tuesday's close, CME Group tools showed that the futures market expected an 88% probability of a 25 basis point rate cut this week, while the probability of a further 25 basis point cut would not reach 71% until June next year, and the probability of such a cut at the meetings in January, March, and April next year would not exceed 50%.

The predictions reflected in the aforementioned CME tool can be summarized by the recently hotly debated term "hawkish rate cut." This means that the Federal Reserve will cut rates this time, but simultaneously hints at a possible pause in such actions, and that no further rate cuts are likely in the near future.

Nick Timiraos, a veteran Fed reporter known as the "new Fed mouthpiece," wrote in a post-meeting article that the Fed "hinted that it may not cut rates any further for the time being" because there was an "unusual" internal disagreement about whether inflation or the job market was more of a concern.

Timiraos pointed out that three officials disagreed with the 25 basis point rate cut at the meeting, and the stalled downward trend in inflation and the cooling job market made this meeting the most divided in recent years.

Some commentators have noted that the dot plot released this time shows that, including the two voting FOMC members, a total of six people expect no rate cut in December. In other words, a total of seven people oppose this 25 basis point rate cut. In terms of the number of people, this is the largest division in 37 years.

For the first time since 2019, a three-vote decision was passed against the interest rate decision.

The biggest difference between this meeting's statement and the previous one at the end of October is that three of the 12 FOMC voting members voted against the 25 basis point rate cut, one more than at the previous meeting in October. This is the first time since 2019 that a Federal Reserve interest rate decision has been opposed by three voting members .

The statement shows that nine FOMC members, including Federal Reserve Chairman Jerome Powell and Fed Governor Tim Cook (who was previously publicly threatened with dismissal by President Trump), supported a further 25 basis point rate cut. The three who voted against it were Stephen Miran, a Fed governor handpicked by Trump this year; Austan Goolsbee, president of the Chicago Fed; and Jeffrey Schmid, president of the Kansas City Fed.

Milan , as he had at the previous two meetings since taking office, consistently advocated for a 50 basis point rate cut . Schmid , like at the last meeting, disagreed because he supported keeping rates unchanged . Goolsby, who previously supported a 25 basis point cut, changed his stance this time and aligned himself with Schmid.

This year, the Federal Reserve has seen dissenting votes at four FOMC meetings. Two FOMC members voted against the resolutions at the July and last meetings, while only Milan voted against them at the September meeting.

These voting divisions reflect a lack of consensus among Federal Reserve policymakers regarding the risks of inflation and employment, especially given the government shutdown which resulted in the delayed or even permanent release of some official data. Opponents of rate cuts primarily worried about stalled progress in declining inflation, while supporters argued for continued action to prevent further job losses and a deteriorating labor market.

The new measure considers the "magnitude and timing" of further interest rate cuts.

Another major change in this meeting's statement compared to the previous one is in the interest rate guidance. Although the decision was made to cut rates this time, the statement no longer states vaguely that the FOMC will assess future data, the evolving outlook, and the balance of risks when considering further rate cuts. Instead, it more specifically considers the "magnitude and timing" of rate cuts. The statement is now read:

"In considering the magnitude and timing of further adjustments to the target range for the federal funds rate, the Committee will carefully assess the latest data, the evolving economic outlook, and the balance of risks."

Following the above statement, the Fed's statement reiterated its firm commitment to supporting full employment and bringing inflation back to the Fed's target level of 2%.

This aligns with Wall Street's previous expectations of an adjustment. They anticipated the statement would revert to the style of a year ago, reusing phrases like "the magnitude and timing of further adjustments." Goldman Sachs believes this adjustment reflects that "the threshold for any further rate cuts is now higher." Other commentators noted that considering "the magnitude and timing" was a phrase from the December statement and was seen as a signal of a pause in action.

The unemployment rate was removed from the description of "remaining low," and was said to have risen slightly as of September.

The statement largely echoed the rhetoric of the previous statement regarding other economic assessments, reiterating that " available indicators show that the pace of economic expansion has moderated" in order to reflect the impact of insufficient official data.

The statement reiterated that job growth has slowed this year , with a slight adjustment to the wording regarding the unemployment rate. Previously, it stated that "the unemployment rate has risen slightly, but remained low as of August," but this time it reads "the unemployment rate rose slightly as of September," removing "remained low." Following these remarks, the statement said that more recent indicators also align with these trends, reiterating that inflation has risen since the beginning of the year and remains slightly high.

As with the previous statement, this statement also said that the FOMC "is concerned about the risks to its dual mandate and judges that downside risks to employment have increased in recent months ."

The RMP plans to buy $40 billion in short-term debt over the next 30 days, and its bond purchases are expected to remain high in the first quarter of next year.

Another significant change in this meeting's statement compared to the previous one is the addition of a paragraph specifically mentioning the need to purchase short-term debt and maintain an ample supply of reserves within the banking system. The statement reads:

The FOMC believes that reserves have fallen to adequate levels and will begin purchasing short-term Treasury securities as needed to maintain an adequate supply of reserves .

This is tantamount to announcing the implementation of so-called reserve management, rebuilding a liquidity buffer for the money market. Because market turmoil often occurs at the end of the year, banks typically reduce their repurchase market activity to support their balance sheets in responding to regulatory and tax settlements.

The following red text shows the deletions and additions in this resolution statement compared to the previous one.

The Federal Reserve Bank of New York, which is responsible for open market operations, also issued a statement on Wednesday, saying it plans to buy $40 billion in short-term Treasury bonds over the next 30 days.

The Federal Reserve Bank of New York announced that it has received instructions from the FOMC to increase its securities holdings in its System Open Market Account (SOMA) by purchasing short-term Treasury securities in the secondary market and, if necessary, Treasury securities with a remaining duration of up to three years to maintain adequate levels of reserves. The size of these Reserve Management Purchases (RMPs) will be adjusted based on anticipated trends in the Fed's demand for liabilities and seasonal fluctuations, such as those caused by tax payment deadlines.

The announcement reads:

"The monthly RMP amount will be announced around the ninth business day of each month, along with a provisional purchase plan for the next 30 days. The trading desk plans to announce the first plan on December 11, 2025, at which time the total amount of short-term Treasury securities under the RMP will be approximately US$40 billion, with purchases commencing on December 12, 2025. "

The trading desk anticipates that the RMP's (purchases) will remain at a high level in the coming months to offset the expected significant increase in non-reserve liabilities in April (next year). Thereafter, the overall pace of purchases is likely to slow significantly based on the expected seasonal changes in the Fed's liabilities. The amount of purchases will be adjusted appropriately based on the outlook for reserve supply and market conditions.

The dot plot shows that seven people opposed this decision, and their forecasts for next year's interest rate are more dovish than the previous one.

The median interest rate projections released by Federal Reserve officials after their meeting this Wednesday showed that their expectations were exactly the same as the previous projections released in September. The specific median projections are as follows:

The federal funds rate is projected to be 3.4% at the end of 2026, 3.1% at the end of 2027, and 3.1% at the end of 2028, with a longer-term federal funds rate of 3.0%, all in line with the September forecast.

Based on the aforementioned median interest rate, as before, Federal Reserve officials now expect three rate cuts this year, followed by approximately one 25 basis point rate cut each next year and the year after .

The dot plot shows that six people expect interest rates to be between 3.75% and 4.0% by the end of this year, accounting for more than 30% of the total number of people providing forecasts. This means that a total of six people believe that interest rates should remain unchanged at this meeting , including two dissenting voting members of the FOMC and four Fed officials without voting rights at this meeting . Including Governor Milan, who strongly advocates for a larger rate cut, the total number of people opposing a 25 basis point rate cut at this meeting reaches seven .

Many had previously predicted that the dot plot, reflecting future interest rate changes, would show Fed officials leaning more hawkish. However, this dot plot did not show that bias; in fact, it leaned more dovish than the previous one.

Of the 19 Fed officials who provided forecasts, seven this time expect interest rates to be between 3.5% and 4.0% next year, compared to eight who did so last time. This means that one fewer person expects no rate cut next year compared to last time .

The dot plot also shows that eight people predict interest rates will be between 3.0% and 3.5%, two more than the previous forecast. Three people predict interest rates will be between 2.5% and 3.0% next year, two fewer than the previous forecast. One person predicts interest rates will be below 2.25%, whereas no one predicted this in the previous forecast.

The four-year GDP growth forecast has been revised upward, while inflation forecasts for this year and next, and unemployment rate forecasts for the year after next, have been slightly lowered.

The economic outlook released after the meeting showed that Federal Reserve officials raised their GDP growth forecasts for this year and the following three years , with the largest increase of 0.5 percentage points for next year . The forecasts for other years were only slightly increased by 0.1 percentage points. The unemployment rate forecast for 2027 was slightly lowered by 0.1 percentage points, while the forecasts for the remaining years remained unchanged . This adjustment indicates that the Federal Reserve believes the labor market is more resilient.

Meanwhile, Federal Reserve officials slightly lowered their PCE inflation and core PCE inflation forecasts by 0.1 percentage points each for this year and next . This reflects a slight increase in the Fed's confidence that inflation will slow in the near future.

As before, Fed officials still expect inflation to fall back to the Fed's long-term target of 2% by 2028, which would be the first time that U.S. inflation has reached the target after seven consecutive years of exceeding it.

The specific predictions are as follows:

• The projected GDP growth rate for 2025 is 1.7%, compared to 1.6% in September; the projected growth rate for 2026 is 2.3%, compared to 1.8% in September; the projected growth rate for 2027 is 2.0%, compared to 1.9% in September; the projected growth rate for 2028 is 1.9%, compared to 1.8% in September; and the longer-term projected growth rate is 1.8%, unchanged from the September forecast.
• The unemployment rate is projected to be 4.5% in 2025 and 4.4% in 2016, both unchanged from the September forecast. The projected rate for 2027 is 4.2%, compared to 4.3% in September. The projected unemployment rate for 2028 and longer-term unemployment is 4.2%, also unchanged from the September forecast.
• The PCE inflation rate is expected to be 2.9% in 2025, up from 3.0% in September; 2.4% in 2026, up from 2.6% in September; 2.1% in 2027; and 2.0% in 2028 and longer-term forecasts, all unchanged from the September forecast.
• The core PCE forecast for 2025 is 3.0%, compared to 3.1% in September; the forecast for 2026 is 2.5%, compared to 2.6% in September; the forecast for 2027 is 2.1%; and the forecast for 2028 is 2.0%, all unchanged from the September forecast.