Federal Reserve lowers policy rate by 25 basis points, dot plot signals 25 basis points in cuts for 2026

The Federal Reserve lowered its policy rate by 25 basis points to a range of 3.5% to 3.75% in its final scheduled meeting of 2025. The move was nearly universally expected by both economists and prediction markets.

“The Committee is attentive to the risks to both sides of its dual mandate and judges that downside risks to employment rose in recent months,” per the statement accompanying the decision.

The central bank also inserted the bolded words (emphasis added by us) into this sentence that had appeared in the previous statement, to nod at the idea that policymakers aren’t in a hurry to cut rates going forward: “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.”

During the press conference, Fed Chair Jerome Powell said the language indicated that the central bank is well positioned to wait and see how the economy evolves before taking any additional action.

The SPDR S&P 500 ETF was modestly lower before 2 p.m. ET, and rose as much as 0.4% before Powell’s press conference started. Stocks rose to session highs as he fielded questions from the press, with the SPDR S&P Regional Banking ETF performing particularly well.

The chair suggested that the labor market has probably been a little softer than headline job creation numbers suggest. Payroll growth is averaging about 40,000 per month since April, which is likely overstated by 60,000, Powell said. Tariffs are the biggest reason why inflation remains well above the central bank’s target, per Powell, and the labor market does not appear to be strong enough to be a catalyst for an acceleration in price pressures.

The central bank’s updated Summary of Economic Projections shows that the median policymaker anticipates it will be appropriate for the policy rate to go down to 3.375%, or another 25 basis points, by the end of 2026. That’s the same as the “dot plot” from mid-September, and in line with the consensus estimate from economists polled by Bloomberg.

There is high dispersion among Fed officials’ outlooks. Powell also reassured markets that despite what some members indicated on the dot plot, rates are still more likely to go down from here than up.

“I don’t think that a rate hike is anyone’s base case at this point, and I’m not hearing that,” he said. “When people are writing down their estimates of policy and where it should go, it is either holding here or cutting a little or cutting more than a little.”

Uncertainty over how much the Fed may ease going forward also reflected in event contracts, which had a more dovish tilt heading into this decision compared to the central bank. Event contracts on Kalshi showed the likelihood of 50 basis points or 75 basis points of easing above 20% apiece, with 25 basis points at 13%.

Compared to September, monetary policymakers are much more bullish on economic growth. The GDP growth forecast was upped to 2.3% from 1.8%.

The forecast for the unemployment rate to end 2026 at 4.4% was unchanged versus September, while the core PCE projection was nudged down a tick to 2.5%.

Three officials dissented from today’s decision. Governor Stephen Miran preferred a 50-basis point cut, while Chicago Fed President Austan Goolsbee and Kansas City Fed President Jeffrey Schmid voted for no change to rates.

At the Fed’s last meeting in October, Fed Chair Jerome Powell warned that a reduction at this meeting was “far from” a foregone conclusion. In the interim, a number of Fed officials (especially nonvoting members) expressed skepticism about delivering a rate cut or disagreed with easing already delivered by the US central bank to date in 2025. But the decisive turn in prediction markets occurred when New York Fed President John Williams said in a speech on November 21, “I still see room for a further adjustment in the near term.”