Fed Cuts Rates Again but Signals Pause as Deep Divisions Hit FOMC

The Federal Reserve delivered a mixed message to markets this week after approving its third interest rate cut of 2025, while simultaneously signaling that further reductions are unlikely. The December 10 FOMC decision, which lowered the federal funds rate by 25 basis points to 3.5%–3.75%, passed in a tense 9–3 vote—the most divided board outcome since 2019.

The rare level of dissent underscores growing uncertainty inside the central bank as policymakers grapple with inflation that remains above target and labor market data that shows signs of weakening.

A Fractured Board Reveals Competing Economic Priorities

The three dissenting votes highlight two sharply different worldviews inside the Fed. Dovish officials argue that softening job numbers justify continued easing. Hawkish members counter that cutting too aggressively risks reigniting inflation, especially with consumer prices still running higher than the 2% goal.

Fed Chair Jerome Powell attempted to bridge the divide by approving the cut but adopting a markedly cautious tone. “We will wait and see,” he said, signaling no commitment to additional moves until clearer economic trends emerge.

New Projections Signal No Cuts in 2026

The biggest surprise came from the Fed’s updated economic projections. Seven of twelve policymakers now expect zero rate cuts in 2026, a dramatic shift from earlier forecasts anticipating multiple reductions next year. The projection reflects growing confidence that the economy can withstand higher rates—and, simultaneously, concerns that inflation may not cool as quickly as hoped.

Adding to the tension, six officials revealed they preferred not to cut rates at all in December, suggesting the decision barely held consensus.

Key Metrics:

• Federal Funds Rate: 3.50%–3.75%

• Total 2025 Cuts: 3 (75 basis points)

• FOMC Vote: 9–3

• Projected 2026 Cuts: 0 (per 7 officials)

Powell Warns of a ‘Complicated and Unusual’ Environment

Powell acknowledged the board’s divisions and described the current economic moment as one where both inflation and employment trends pose challenges.

He emphasized that inflation remains “difficult” to bring down despite recent progress. At the same time, the labor market is cooling faster than expected, complicating the Fed’s ability to maintain stability without triggering a recession.

The Fed Chair’s tone marked a clear departure from earlier months when policymakers expressed confidence in easing financial conditions.

Why Members Dissented Against the Cut

Hawkish dissenters argued that another rate cut risks undermining the Fed’s credibility, especially when inflation continues to exceed 2%. These officials say easing prematurely could force the central bank to reverse course later with more aggressive tightening.

Their votes also reflect concern that earlier cuts may have been unnecessary given recent signs of economic resilience.

What This Means for Borrowers, Savers, and Markets

With the Fed signaling a prolonged pause, markets are recalibrating expectations. Mortgage rates may stabilize rather than fall further, and variable-rate borrowers may see elevated payments persist through 2026. Savers, however, could benefit from higher yields as banks maintain competitive deposit rates.

Stock markets reacted cautiously, balancing hopes for economic support with realism about higher-for-longer borrowing costs. Analysts say credit conditions could tighten if inflation remains sticky into next year.

The bottom line: the era of rapid rate cuts appears to be ending, replaced by a slower, more uncertain path shaped by inflation and labor market data.