December 2025 FOMC Update

The Federal Reserve (Fed) delivered a third consecutive 25 basis point cut today, lowering the target policy range to 3.50%–3.75%. There were three dissenters at this meeting, with two members favoring keeping the rate unchanged—an increase from one at the prior meeting. The same dissent for a 50 basis point cut persisted. The Fed also announced it will purchase $40 billion of Treasury bills over the next 30 days. These reserve management purchases (RMP) were described as operational and not part of monetary policy. The purchases could remain elevated through the first half of 2026.

Current Conditions

Economic activity is expanding, but downside risks to the labor market have increased. Layoffs and hiring remain low, and disparities in the employment data persist. There has been a recent uptick in goods inflation that may be tariff-related, while service prices have decelerated. Government shutdown-related effects have slowed the current quarter’s GDP.

Forward Guidance

The dot plot released for year-end 2026 remains unchanged from the September meeting at 3.375%, which calls for one additional rate cut next year. In today’s press conference, Powell stated that monetary “policy is in a broad range of neutral” and that the Fed is well positioned to wait and see how the economy evolves.

Policy/Market Reaction

Bond yields were a few basis points lower prior to the release and have dropped further during the press conference, with the yield curve steepening. Risk markets have reacted positively, as equities are higher and corporate spreads are tighter. The probability of another cut in January decreased a few weeks ago and remains around 25%.

Tim Musial, CFA,  is head of fixed income for CIBC Private Wealth with more than 25 years of experience. In this role, he oversees the firm’s fixed income team, strategy, trading and policy formulation in addition to focusing on portfolio management and analysis of both taxable and tax-exempt bond investment offerings.