Fed delivers third straight rate cut in final 2025 meeting

Despite warnings that a December rate cut was anything but certain, the Federal Reserve’s Federal Open Market Committee (FOMC) slashed its funds rate by another 25 basis points on Wednesday.

The cut is the third straight to the federal funds rate, which now sits between 3.50% and 3.75%. The rate hasn’t been this low since November 2, 2022, when the central bank raised its funds rate 75 basis points to 3.75% to 4%.

The vote wasn't as close as expected. Only three members of the FOMC voted against the 25-bps cut. Stephen Miran voted for a 50-bps cut, and Austan Goolsbee and Jeffrey Schmid voted against a cut. It is the second straight meeting in which Miran has wanted a 50 bps cut, and Schmid has voted against any cut.

A new "dot plot" was also issued after the decision. It shows seven members of the Fed expecting the funds rate to be at or 25 bps above its current level in 2026. Four members saw it decrease by 25 bps in 2026, four more saw a 50 bps decline, and three others saw a decline of more than 50 bps. 

Fed chair Jerome Powell indicated that with the 75 bps cuts over the last three meetings, the rate is likely near neutral. The central bank will base the timing and amount of future cuts on upcoming data. As for the housing market, Powell said in his opening statement, "Activity in the housing sector remains weak."

The market stalled after the October cut when Powell scolded the market for guessing along with the central bank. At that time, he cautioned that a December cut was not a foregone conclusion.

Sam Williamson, senior economist at First American, told Mortgage Professional America he expected a hawkish tone to Powell’s comments on Wednesday.

“Many officials remain concerned about inflation and worry the Fed may be lowering rates too quickly,” Williamson said. “Against that backdrop, a ‘hawkish cut’ now looks possible, potentially with multiple dissents, with officials likely to stress a higher bar for additional rate cuts.”

Job market struggling

Since October, the job market has continued to struggle with widespread layoffs and limited hiring. Challenger, Gray & Christmas reported last week that more than 70,000 workers were laid off in October, bringing the yearly total through October to 1.17 million.

Meanwhile, the inflation data released to the public has shown it is largely unchanged. Last week, the core personal consumption expenditures (PCE) price index, which is the Fed’s favored inflation measure, rose just 0.2% in September, putting the annual rate at 2.8%.

One thing Powell is expected to say on Wednesday afternoon is that he expects a regular release of official data by the time the FOMC announces its next rate decision on January 28, 2026, or the central bank might be forced to hold due to a lack of data.

In addition, several Fed members may dissent from the official decision, likely those who wanted to hold rates and see the effects of the two previous cuts more closely. Williamson didn’t think potential dissents would weigh too heavily on the market.

“A more openly divided Fed can increase perceived policy uncertainty, nudging term premiums higher and making Treasury yields—and, by extension, mortgage rates—a bit more volatile around key meetings,” he said. “However, the overall level of mortgage rates is still driven primarily by the underlying inflation outlook, expectations for the full path of rate cuts, and mortgage rate spreads.

“If the Fed’s statement stresses a higher bar for additional easing and hints at a January pause, it could temper how aggressively markets price additional cuts.”

A new FOMC in 2026

With this meeting being the last in 2025, the makeup of the Fed’s FOMC will change in 2026. How many changes will be made is likely to be decided by the courts.

The known changes will include a cycle change in four of the regional governor slots on the voting board. Regional Fed governors from Boston, Chicago, St. Louis, and Kansas City will be replaced by those from Cleveland, Minneapolis, Dallas, and Philadelphia for 2026.

Also, Stephen Miran’s term ends January 31. He could be extended for another full term, or he could slide into Lisa Cook's unfinished term if the Supreme Court allows the administration to fire her.

Sam Williamson of First American says the Fed is poised for a third straight 25 bps cut, driven by labor market softness, but warns of a “hawkish cut” signaling caution for 2026.https://t.co/U7yVBUnQVk

— Mortgage Professional America Magazine (@MPAMagazineUS) December 9, 2025

May 23 will bring one of the biggest changes of the year when Jerome Powell’s term as chair comes to an end. It is expected that President Donald Trump will name a new chair to replace him, with National Economic Council director Kevin Hassett believed to be the frontrunner. It is unclear whether Powell will finish his term on the FOMC, which continues through January 31, 2028.

This version of the FOMC has weathered a turbulent year. Opinions are mixed about how well they navigated the headwinds, although Williamson gave them high marks for their efforts.

“More important than a letter grade is how the Fed navigated a difficult economic landscape,” he said. “While inflation remains above the long-run target and has recently trended in the wrong direction, expectations remain anchored, despite tariff-related and other supply-side headwinds. The labor market has cooled without collapsing, and the Fed has nudged policy toward neutral rather than waiting for a sharper downturn.