Fed December Rate Cut
- Kevin W. Frisz
- Dec 11, 2025
- 3 min read
December 11, 2025
“The sheer quantity of brain power that hurled itself into the search for new baseball knowledge was either exhilarating or depressing, depending on how you felt about baseball. The same intellectual resources might have cured the common cold, or put a man on Pluto.” — Michael Lewis, Moneyball
Summary
Yesterday, a great wizard came down from the mountain and shared his wisdom with the assembled masses who were desperate for knowledge and guidance. In other words, I listened to the Fed Chair’s press conference so you don’t have to.
As expected, the Fed cut short-term rates by 0.25% to 3.50-3.75%. But the more important question: will we get more rate cuts next year? In a very parental fashion, Chair Powell said, “Maybe, we’ll see”.
Powell did say that their bias is towards more cuts. So that’s good. But he also said further cuts have a higher bar to meet. Wall Street now expects 2 cuts next year. Overall, Powell’s comments helped the market rally yesterday afternoon. But today, it seems to be old news already.
Fed Meeting Summary and Outlook
Yesterday was the much anticipated December meeting of the Fed. As expected, Jerome (“Jay”) Powell announced a cut to a target range of 3.5-3.75%. This is the lowest level since Nov ’22. (That’s when the Fed was increasing rates to fight inflation from the covid shutdown.)
Let’s go back to our analogy of the economy is a car. The Fed is the driver. Our car is on a windy downward hill. We have no gas pedal. Only a brake. When the Fed needs to slow down, it steps on the brake (ie, raises interest rates). Then, when it needs to speed up, it eases off on the brake (ie, lowers interest rates).
Back in 2022, the Fed slammed on the brakes. Inflation from the pandemic was lasting longer than it should have. So, they needed to shut it down. And it worked. Inflation came down a lot. So now, the Fed is easing off on the brake -- both because inflation is almost back to normal and because the job market is weakening.
Powell believes that rates now are in “neutral” territory. Imagine wanting the car to neither slow down or speed up – you want it to stay at the current speed. That’s what Powell means by “neutral”. They might cut 1-2 more times next year, to move deeper into the neutral zone. But they think they’re basically arrived.
Goldman Sachs expects 2 cuts next year (in March and June). Morgan Stanley also expects 2 cuts (but in January and April). So even Wall Street is unsure.
Of course, the road is windy and uneven. We’ll have to adjust to what comes around the bed. If unemployment continues to get worse, they’ll lower rates more aggressively (ie, ease up on the brake).
Interestingly, on the unemployment question, Powell dropped a bomb in the press conference Q&A session. He said they believe that the monthly job figures have been overstated since April. They believe the true job monthly job growth figure was -20k jobs lost. In any other scenario in history, this would be cause for alarm. An almost certain sign of a pending recession.
However, Powell notes that the “supply” of workers is shrinking, due to immigration being effectively cut off. And so, he believes that unemployment (their focus) is not necessarily in mortal danger. Basically: “the number of open jobs are down, but so is the number of people to fill them”. So maybe it will all balance each other out…?
If you think about GDP at its most basic level, it’s “hours worked” x “output per hour”. The ongoing drop in “hours worked” from a shrinking workforce is now a big headwind to GDP growth. But at the moment, increased productivity is making up for it. (Essentially, “output per hour” is growing by more.)
But here’s the kicker. The Fed’s mandate is not “GDP growth”. It’s “unemployment”. If the workforce is shrinking because the supply of workers is shrinking, that’s not necessarily a bad thing in their mind. GDP growth might suffer. But wages should remain healthy if there is still adequate demand for the workers that remain.
The Fed expects 2%ish real GDP growth next year. That’s partially helped by snapback in govn spending from the shutdown in ‘25. It’s also boosted slightly by tax policy in the new “One Big Bill” related to capital investment, which encourages more investing upfront.
See chart below for their full forecasts.
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