The Federal Reserve lowered its policy rate by 25 basis points to a range of 3.5% to 3.75% in its final meeting of 2025, a move economists and prediction markets had almost fully priced in.
In its statement, the Committee noted that downside risks to employment have increased in recent months. Markets took the decision in stride. SPY ticked slightly lower before the announcement, then firmed afterward, while two-year Treasury yields extended their decline.
The Fed’s updated Summary of Economic Projections shows the median official expecting rates to fall to 3.375% by the end of 2026, signaling one additional 25-basis-point cut next year. That matches the September dot plot and aligns with Bloomberg’s economist survey. Under the surface, though, officials remain split, with wide dispersion in their rate forecasts.
Event contracts on Kalshi captured that uncertainty, with traders assigning meaningful odds to both a 50-bp and 75-bp cut heading into the meeting, while a 25-bp move carried lower odds.
On the economic outlook, Fed officials marked up their 2026 GDP growth forecast to 2.3% from 1.8%, held the unemployment rate forecast steady at 4.4%, and nudged core PCE expectations down to 2.5%.
The decision drew three dissents. Governor Stephen Miran preferred a larger 50-bp cut, while Chicago Fed President Austan Goolsbee and Kansas City Fed President Jeffrey Schmid voted to keep rates unchanged.
Powell had warned in October that today’s cut was “far from” assured, and several officials spent November questioning whether more easing was appropriate. But sentiment shifted after New York Fed President John Williams signaled “room for a further adjustment” on November 21, ultimately tipping expectations toward today's outcome.
The cut is done. The Fed’s divide is clear. And 2026 is now shaping up to be another year where the dots matter just as much as the data.