12/10/2025. Fed's Third Rate Cut Closes the Year

The Federal Reserve today voted today to cut Federal Fund target rate by another quarter percentage point for the third time this year, to 3.5-3.75%. Although this rate cut was widely expected by investors and economists alike, the path forward continues to look uncertain into 2026 for more or deeper rate cuts. The votes also indicated a divided Federal Reserve Board, with CNBC reporting three Fed governors dissenting: "Fed governor Stephen Miran, who is on temporary leave from the White House, voted for a half point cut. Regional presidents Jeff Schmid and Austan Goolsbee voted for no change to rates at all."

Current economic data out of the U.S. is mixed, adding to the confusion. On one hand, the recent Job Openings and Labor Turnover Summary (JOLTS) published by the Bureau of Labor Statistics (BLS) yesterday showed that jobs, hiring, and employee turnover has remained stable, indicating the labor market is in a no-fire, no-hire holding pattern. This would bolster the case for a reduction in borrowing costs to stimulate investment and expansions. However, with inflation still running slightly higher the Federal Reserve's 2% inflation target, at around 3% as last reported by the BLS based on delayed September data, there is still risk of an overheating economy if rates are cut too quickly. It is also important to point out that many firms have not been hiring due to factors independent of borrowing costs including continued uncertainty in economic and trade policy including more and more tariff costs being passed down to consumers over time. No October inflation report was available due to the government shutdown.

For now, in absence of better data and indicators that show a relatively stable domestic economy, but one that may continue to slow, the Federal Reserve Board has decided in favor of encouraging growth and protecting jobs rather than fighting inflation. This is a reasonable move, all things considered. As a matter of speculation, the Federal Reserve is also expected to cut the target rate down at least one more quarter point in 2026, to 3.25-3.5% before re-evaluating the rate environment. For context, in a comment to the Wall Street Journal CEO Council, Kevin Hassett, President Trump's current front-runner to succeed Powell as Fed Chair stated, "there is 'plenty of room' to cut interest rates further, though he added that if inflation rises the calculation may change".

Besides domestic concerns, there are also signals and investor expectations that the EU may be preparing to increase interest rates in 2026, which may see an additional fall in the value of the U.S. dollar against other higher-interest-rate currencies, lowering purchasing power of the dollar, but possibly boosting exports as a result. And despite U.S. tariffs, China's trade surplus recently topped $1 trillion as China increased its shipments to to non-U.S. markets.

As the cost of borrowing continues to come down, and with the economy in a near-constant state of uncertainty, it is important today as yesterday to adjust your financial plan and your investments to suit the present state of the economy, domestic and global. As interest rates fall, your bank savings will see less and less interest income. Measured against inflation, it's possible you may need to commit to a realignment to retain the same purchasing power on your money. Consult with a financial advisor today to help you with your realignment, and better position your portfolio and cash flow to meet your financial goals.

References

1. https://www.nbcnews.com/business/economy/fed-again-cuts-rates-third-time-year-rcna248226

2. https://www.bls.gov/news.release/jolts.nr0.htm

3. https://www.bls.gov/news.release/cpi.nr0.htm

4. https://www.ft.com/content/cb4179b2-bafa-4292-99f4-d7f4503fc9d9

5. https://www.reuters.com/markets/us/white-house-advisor-hassett-plenty-room-cut-rates-wsj-2025-12-09/

6. https://www.stlouisfed.org/on-the-economy/2025/oct/how-tariffs-are-affecting-prices-2025

7. https://apnews.com/article/china-trade-tariffs-trump-exports-953ab5e9056cf7b21c00c54bec1d79dd

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