The Federal Reserve lowered interest rates by 25 basis points as expected, but three committee members opposed it. It still anticipates one rate cut next year and will purchase $40 billion in short-term bonds

Key Points:

The Federal Reserve, as the market expected, cut interest rates by 25 basis points for the third consecutive time, but for the first time since 2019, there were three dissenting votes on the rate decision.

The Trump-appointed governor, Milan, continued to advocate for a 50 basis point cut, while two regional Fed presidents and four non-voting members supported maintaining the current rate, resulting in a total of seven opposing the decision, reportedly the largest disagreement in 37 years.

The meeting statement reiterated that inflation remains slightly elevated, and the risk of job losses has increased in recent months, removing the phrase "unemployment rate remains low" and stating it has slightly risen as of September.

The statement added considerations for the "magnitude and timing" of further rate cuts, which is seen as an indication that the threshold for rate cuts has become higher.

The statement noted that reserves have fallen to adequate levels, and to maintain sufficient reserves, the Fed will begin purchasing short-term bonds starting this Friday. The New York Fed plans to buy $40 billion in short-term bonds over the next 30 days, with expectations of high levels of bond purchases in the first quarter of next year.

The median value of interest rate expectations remained unchanged from the last meeting, suggesting one rate cut each in the next two years, with the dot plot's rate forecast for next year shifting slightly dovish, with one fewer person expecting no rate cuts, totaling seven.

Economic outlooks have been revised upward for GDP growth expectations for this year and the next three years, while slightly lowering inflation expectations for this year and next, as well as the unemployment rate for the year after next.

The "New Federal Reserve News Agency" suggests that the Fed indicates it may not cut rates again for the time being, due to a "rare" level of disagreement internally regarding the relative concerns of inflation and employment.

The Federal Reserve, as the market expected, again cut rates at a regular pace, but revealed the largest internal disagreement among voting decision-makers in six years, indicating a slowdown in actions next year and a potential pause in the near term. The Fed also initiated reserve management as Wall Street anticipated, deciding to purchase short-term government bonds by the end of the year to address pressures in the money market.

On December 10th, Wednesday, Eastern Time, the Federal Reserve announced after the Federal Open Market Committee (FOMC) meeting that the target range for the federal funds rate was lowered from 3.75% to 4.00% to 3.50% to 3.75%. This marks the third consecutive FOMC meeting where the Federal Reserve has cut rates, each time by 25 basis points, totaling a 75 basis point reduction this year, and a cumulative cut of 175 basis points since the beginning of this easing cycle in September of last year.

The dot plot released after the meeting showed that the Federal Reserve's rate path forecast remains consistent with the dot plot released three months ago, still expecting one 25 basis point cut next year. This indicates that the rate cut actions next year will be significantly slower than this year.

This rate cut and the indication of a slowdown in actions next year were almost entirely anticipated by the market. By the close on Tuesday, the CME tool indicated that the futures market expected an 88% probability of a 25 basis point cut this week, while the probability of at least another 25 basis point cut reaching 71% by June of next year. The probabilities for similar cuts in the January, March, and April meetings did not exceed 50%.

The predictions reflected by the CME tool can be summarized by the recently discussed term "hawkish rate cut." It refers to the Fed cutting rates this time but simultaneously indicating a potential pause in actions afterward, with no further cuts expected in the near term.

Nick Timiraos, a senior Fed reporter known as the "New Federal Reserve News Agency," stated after the Fed meeting that the Fed "indicates it may not cut rates again for the time being," due to a "rare" disagreement internally regarding which is more concerning: inflation or the job market Timiraos pointed out that three officials opposed the 25 basis point rate cut at this meeting, making it one of the most divided meetings in recent years due to stagnant inflation and a cooling job market.

There are also comments stating that the dot plot released this time shows that six people, including three voting FOMC members, expect no rate cut in December. In other words, a total of seven people opposed the 25 basis point rate cut, marking the largest division in 37 years.

First Time Since 2019 with Three Votes Against the Rate Decision

Compared to the last meeting's decision at the end of October, the biggest difference in this meeting's statement is that three out of the twelve voting FOMC members voted against the 25 basis point rate cut, one more dissenting vote than the last meeting in October. This is the first time since 2019 that the Federal Reserve's rate decision has faced opposition from three voting members.

The statement shows that nine FOMC members, including Federal Reserve Chairman Jerome Powell and Fed Governor Cook, who was publicly threatened with dismissal by President Trump, supported the continued 25 basis point rate cut. The three dissenting votes came from Stephen Miran, who was "appointed" by Trump, Austan Goolsbee, President of the Chicago Fed, and Jeffrey Schmid, President of the Kansas City Fed.

Among them, Miran has consistently hoped for a 50 basis point rate cut, just like in the previous two meetings he attended since taking office. Schmid opposed the cut this time because he supports keeping rates unchanged. Goolsbee, who supported the 25 basis point cut last time, has now changed his stance and stands with Schmid.

This year, there have been dissenting votes in four FOMC meeting decisions. In July and the last meeting, there were two FOMC members opposed, while in September, only Miran opposed.

These voting discrepancies reflect that, in the context of government shutdowns leading to some official data not being disclosed in a timely manner or even permanently missing, the Federal Reserve decision-makers do not have a unified view on the risks of inflation and employment. Those opposing the rate cut mainly worry about the stagnation of declining inflation, while those supporting the cut believe that action should continue to avoid accelerated job losses and worsening labor market conditions.

New Considerations for Further Rate Cuts in "Magnitude and Timing"

Another major change in this meeting's statement compared to the last one is reflected in the interest rate guidance. Although the decision was made to cut rates this time, the statement no longer vaguely states that when considering further rate cuts, the FOMC will assess future data, continuously changing prospects, and risk balances. Instead, it more clearly considers the "magnitude and timing" of the rate cut. The statement was revised to:

"When considering the magnitude and timing of further adjustments to the target range for the federal funds rate, the (FOMC) committee will carefully assess the latest data, the evolving (economic) outlook, and the risk balance."

Following this statement, the Fed reiterated its firm commitment to supporting full employment and bringing inflation back to its target level of 2% This is consistent with the adjustments previously anticipated by Wall Street professionals. They expected the statement to return to the style of a year ago, reusing phrases like "the magnitude and timing of further adjustments." Goldman Sachs believes that this adjustment reflects that "the threshold for any further rate cuts will be higher."

Remove "unemployment rate remains low," stating it has slightly risen as of September

Most of the other economic evaluations in the statement largely followed the wording of the last statement, reiterating that "available indicators show that the pace of economic activity has moderated" to reflect the impact of insufficient official data.

The statement reiterated that employment growth has slowed this year, with a slight adjustment to the description of the unemployment rate. The last statement said, "the unemployment rate has slightly risen but remains low as of August," which has now changed to "the unemployment rate has slightly risen as of September," removing "remains low." Following these remarks, the statement noted that more recent indicators are also consistent with these trends, reiterating that the inflation rate has risen since the beginning of the year and remains slightly elevated.

As with the last statement, this one also mentioned that the FOMC "is attentive to the risks facing its dual mandate and assesses that the downside risks to employment have increased in recent months."

Plans to buy $40 billion in short-term debt over the next 30 days, expecting high levels of bond purchases in the first quarter of next year

Another significant change in this meeting's statement compared to the last one is the addition of a paragraph specifically pointing out the intention to purchase short-term debt to maintain ample reserves in the banking system. The statement read:

"(FOMC) Committee believes that the reserve balances have fallen to adequate levels and will begin to purchase short-term Treasury securities as needed to continue to maintain ample reserve supply."

This effectively announces the initiation of so-called reserve management to rebuild liquidity buffers in the money market. This is because market disruptions often occur at the end of the year, and banks typically reduce their activities in the repurchase market at year-end to support their balance sheets in response to regulatory and tax settlements.

The following red text highlights the deletions and additions in this decision statement compared to the last one.

The New York Fed, responsible for open market operations, issued a notice this Wednesday, stating its plan to buy $40 billion in short-term Treasury securities over the next 30 days.

The New York Fed's announcement stated that it received instructions from the FOMC to increase the securities holdings in the System Open Market Account (SOMA) by purchasing short-term Treasury securities in the secondary market and, if necessary, buying Treasury securities with a remaining maturity of up to three years to maintain adequate reserve levels. The scale of these Reserve Management Purchases (RMP) will be adjusted based on expected trends in the demand for Federal Reserve liabilities and seasonal fluctuations, such as those related to tax day.

The announcement stated:

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

The trading desk expects that to offset the anticipated significant increase in non-reserve liabilities in April (next year), RMP's (purchases) will remain at a high level in the coming months. Subsequently, the overall pace of purchases may significantly slow down based on expected seasonal changes in Federal Reserve liabilities. The amount of purchases will be appropriately adjusted according to the outlook for reserve supply and market conditions.”

The dot plot shows seven dissenters in this decision, with next year's interest rate forecast shifting dovishly compared to the last time

The median value of the Federal Reserve officials' interest rate forecasts released after Wednesday's meeting shows that the officials' expectations this time are exactly the same as the last forecast published in September. The specific median values are as follows:

The federal funds rate at the end of 2026 is 3.4%, the federal funds rate at the end of 2027 is 3.1%, the federal funds rate at the end of 2028 is 3.1%, and the longer-term federal funds rate is 3.0%, all unchanged from the September expectations.

Based on the above median interest rates, similar to the last time, Federal Reserve officials currently also expect that after three rate cuts this year, there will likely be one 25 basis point cut each next year and the year after.

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

Previously, many expected that the dot plot reflecting future interest rate changes would show a more hawkish stance from Federal Reserve officials. However, this dot plot does not reflect such a tendency and is instead more dovish compared to the last one.

Among the 19 Federal Reserve officials providing forecasts, seven expect next year's interest rate to be between 3.5% and 4.0%, while eight had such predictions last time. This means that the number of officials expecting no rate cut next year is one less than last time.

The dot plot also shows that eight officials expect the interest rate to be between 3.0% and 3.5%, which is two more than the last time. This time, three officials predict next year's interest rate to be between 2.5% and 3.0%, which is two less than last time, and one official predicts the interest rate to be below 2.25%, while no one made such a prediction last time.

Upgraded GDP growth expectations for four years, slightly downgraded inflation and unemployment rate expectations for this year and next year

The economic outlook released after the meeting shows that Federal Reserve officials have upgraded the GDP growth expectations for this year and the next three years, with next year's growth rate being upgraded the most, increased by 0.5 percentage points, while other years were only slightly increased by 0.1 percentage points, and the unemployment rate expectation for 2027, that is, the year after next, was slightly downgraded by 0.1 percentage points. The unemployment rate expectations for the remaining years remain unchanged**. This adjustment indicates that the Federal Reserve believes the labor market is more resilient.

At the same time, Federal Reserve officials slightly lowered the PCE inflation and core PCE inflation expectations by 0.1 percentage points for this year and next year. This reflects the Federal Reserve's slightly increased confidence in a slowdown in inflation over the coming period.

As before, Fed officials still expect that by 2028, inflation will fall back to the Fed's long-term target level of 2%, which would mark the first time the U.S. inflation rate meets the target after being above it for seven consecutive years.

Specific forecasts are as follows:

• The GDP growth expectation for 2025 is 1.7%, up from the September expectation of 1.6%. The expected growth rate for 2026 is 2.3%, compared to the September expectation of 1.8%. The expected growth rate for 2027 is 2.0%, up from the September expectation of 1.9%. The expected growth rate for 2028 is 1.9%, compared to the September expectation of 1.8%. The longer-term expected growth rate remains at 1.8%, unchanged from the September expectation.
• The unemployment rate expectation for 2025 is 4.5%, while the expectation for 2026 is 4.4%, both unchanged from the September expectation. The expectation for 2027 is 4.2%, down from the September expectation of 4.3%. The unemployment rate expectations for 2028 and the longer term are both 4.2%, unchanged from the September expectation.
• The PCE inflation rate expectation for 2025 is 2.9%, down from the September expectation of 3.0%. The expectation for 2026 is 2.4%, compared to the September expectation of 2.6%. The expected growth rate for 2027 is 2.1%, while the expectations for 2028 and the longer term are both 2.0%, unchanged from the September expectation.
• The core PCE expectation for 2025 is 3.0%, down from the September expectation of 3.1%. The expectation for 2026 is 2.5%, compared to the September expectation of 2.6%. The expectation for 2027 is 2.1%, while the expectation for 2028 is 2.0%, both unchanged from the September expectation.