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Federal Reserve Prepares for Final Interest Rate Decision of 2025 Amid Economic Uncertainty
The Federal Reserve is poised to announce its last interest rate decision of 2025 this Wednesday, bringing to a close a tumultuous year for the U.S. economy. The past year has been characterized by emerging challenges in the labor market and inflation fueled by tariffs, exacerbating the nation’s ongoing affordability crisis.
A unique challenge facing the U.S. central bank is the absence of crucial government data ahead of its decision. Key November hiring figures and the latest inflation report have been delayed until mid-December, following the Fed’s meeting, due to the recent government shutdown.
These two metrics are traditionally vital to the Fed’s interest rate deliberations, as they directly impact its “dual mandate” to maintain both low inflation and low unemployment. Reconciling these objectives has proven difficult this year, with a noticeable slowdown in hiring, a surge in layoffs, and an uptick in inflation, partly attributed to the Trump administration’s tariffs.
Economists Anticipate Another Quarter-Point Cut
Despite the mixed economic signals, a consensus among economists points to another interest rate cut at the December 10 meeting. CME FedWatch, which gauges the likelihood of rate changes using futures pricing data, indicates an 88% probability of a 0.25 percentage-point reduction in the Fed’s benchmark rate. This would mark the third consecutive cut by the Fed, lowering the federal funds rate-the rate at which banks lend to each other overnight-to a range of 3.75% to 4%.
Such a rate cut could offer some relief to borrowers by decreasing the cost of various loans, including credit card APRs and home equity lines of credit. This measure could provide a boost to American households, many of whom continue to feel the strain of rising costs for essentials like food and healthcare.
“As discussions about affordability take center stage across the United States, the Federal Reserve appears poised to cut interest rates a third time,” noted Stephen Kates, a financial analyst at Bankrate. He added, “The absence of recent inflation data leaves the Federal Reserve operating with limited visibility, while alternative labor indicators and political pressure are steering the committee toward a more accommodative policy stance.”
President Trump and other administration officials have consistently criticized Fed Chair Jerome Powell throughout the year, urging earlier action to reduce interest rates.
However, another rate cut is not without its own risks. Lowering borrowing costs could stimulate increased spending by consumers and businesses, potentially leading to higher inflation, as Kates pointed out.
A Divided Federal Reserve
While economists widely expect the Fed to approve a rate cut on Wednesday, it’s anticipated that not all members of the Federal Open Market Committee (FOMC)-the central bank’s 12-member rate-setting panel-will endorse the move.
Several FOMC members have publicly expressed support for rate cuts recently, including Federal Reserve Bank of New York president John Williams, who last month stated that labor market weakness outweighs inflation concerns. Conversely, in October, Powell cautioned that a December rate cut was not a “foregone conclusion,” citing indications of a robust job market.
“It’s difficult to recall a time when the Federal Open Market Committee has been so evenly divided about the need for additional rate cuts than the upcoming December meeting,” commented Michael Pearce, chief U.S. economist at Oxford Economics. “It’s a close call, but on balance we expect the committee to vote to lower rates” by a quarter of a percentage point.
Outlook for 2026: More Rate Cuts?
For consumers, businesses, and investors alike, a significant question revolves around whether policymakers will signal further rate cuts for 2026.
Current economic forecasts, according to a FactSet poll, suggest the Fed will likely maintain rates at its next meeting on January 27-28, with a 62% probability that rates will remain unchanged.
Despite this, economists generally anticipate more rate cuts in 2026, though the exact timing remains uncertain. Maxime Darmet, senior economist at Allianz Trade, suggested the Fed might wait until March for its first cut of the year, given that inflation still exceeds its 2% annual target.
The labor market, however, remains a critical wild card, as highlighted by Goldman Sachs analysts in a recent research report. Employers have shed over 1.1 million jobs through November, marking the highest number since 2020 and a 54% increase from the same period last year, according to outplacement firm Challenger, Gray & Christmas.
The increasing reliance on artificial intelligence by employers is also a factor, with some companies citing AI-driven efficiency as a reason for job reductions. A continuation of this trend could lead to weaker hiring or even a surge in layoffs in 2026, bolstering the case for additional rate cuts next year, Goldman Sachs analysts noted.
“[W]e see this as the greatest uncertainty and the most important question for 2026: Will somewhat firmer growth really be enough to stabilize a labor market where job growth outside of health care has been running negative recently and companies are increasingly focused on using AI to cut labor costs?” Goldman analysts questioned.