The Federal Reserve cut its benchmark interest rate to 4.25-4.5% in December 2025, the lowest level since 2022, but signaled a more cautious path ahead as inflation remains above the 2% target. The decision came with only one rate cut projected for 2026, down from two cuts anticipated in September projections, reflecting persistent price pressures despite a cooling economy.
What Happened
The Fed’s December meeting produced a rare triple dissent, with a 9-3 vote on the rate decision. The updated Summary of Economic Projections showed officials raising their inflation forecasts while reducing the expected pace of rate cuts. Core PCE inflation, the Fed’s preferred measure, stood at 2.8%—still well above the 2% target.
Key Data
New federal funds rate: 4.25-4.5%
Core PCE inflation: 2.8%
Unemployment rate: 4.2%
30-year mortgage rate: 6.18% (December 24, 2025)
Projected 2026 cuts: One, down from two
Expert Analysis
“The Fed is navigating a difficult path between inflation that won’t quite settle and an economy that’s slowing but not collapsing. The message is that rates will stay higher for longer than markets hoped.”
— Michael Pearce, Lead U.S. Economist, Oxford Economics
“This was always going to be the hard part—getting inflation from 3% to 2%. The last mile requires patience that markets don’t always have.”
— Gregory Daco, Chief Economist, EY-Parthenon
What’s Next
Market expectations have adjusted to fewer cuts in 2026. The housing market, which had hoped for mortgage rate relief, faces continued affordability challenges. Business investment decisions may be delayed as companies await clearer signals on the rate path.
Frequently Asked Questions
Why did the Fed cut rates if inflation is still high?
The Fed balances inflation against employment and economic growth. With unemployment rising and growth moderating, some easing was deemed appropriate even with inflation above target.
About the Author
Dr. Nathan Whitfield is a former Federal Reserve economist with 20 years of experience in monetary policy analysis. He holds a Ph.D. in Economics from MIT.
