The Federal Reserve (Fed) trimmed its benchmark rate to 3.50–3.75% in December 2025, a modest move reflecting deep unease: inflation remains sticky — in part because of trade tariffs — while unemployment has crept up to 4.4%. The cut isn’t a pivot to easy money. It’s a cautionary, “hawkish cut” meant to calm markets without sacrificing inflation-fighting credibility.
Why this cut matters — and why it’s being called “hawkish”
Rate dropped but tone stayed firm
On December 10, 2025, the Fed’s policy-setting body, the Federal Open Market Committee (FOMC), voted 9–3 to reduce the federal funds rate by 25 basis points, bringing it into the 3.50–3.75% range.
That makes it the third consecutive cut in 2025 — after reductions in September and October. Still, three dissenters (some backing no change, one pushing for a larger 50 bps cut) show the split within the Fed.
The shift may seem dovish (rate cuts usually are), but the Fed’s messaging remains tight: this is a measured adjustment — not the start of an easing cycle. Market watchers call that stance “hawkish cut.”
Inflation remains too hot — thanks in part to tariffs
Inflation has been creeping upward through 2025. Officials note price pressures, especially on goods, have risen — in part because of tariffs imposed in recent years.
At the same time, unemployment has edged up. By September 2025, data showed job gains slowing, with the unemployment rate rising to 4.4%, a notable increase in what had been a tight labor market.
Fed Chair Jerome Powell described the environment plainly: risks to inflation remain tilted upward because of tariffs and goods-price increases; risks to employment have shifted downward because hiring has cooled. The Fed has only one tool — interest rates — and it can’t fully fix both at once.
Thus, the December cut reflects a balancing act: acknowledge labor-market softness while signalling that the fight against inflation isn’t over.
What this means for 2026 — and why the Fed isn’t rushing
Soft landing remains elusive
With this move, the Fed is aiming for “stability, not stimulus.” They trimmed the cost of borrowing slightly, giving some breathing room to businesses and households — but not enough to ignite a sharp rebound.
- They still expect only one more 25 bps cut in 2026.
- Inflation forecasts for 2026 suggest a gradual easing: core inflation may moderate as tariff-related price pressure fades — but it isn’t expected to plunge immediately.
- On the labor side, Fed officials are wary: job growth has been sluggish, and added economic uncertainty (global trade, tariffs, potential downturns) means any rebound is conditional.
In short, this isn’t the start of an aggressive rate-cut campaign. It’s more like a recalibration: nudging rates down a bit while watching closely what comes next.
Tariffs remain a wildcard
Here’s the crux — tariffs have distorted price signals.
- Goods inflation spiked in 2025, partly because imported goods became more expensive. That undercut one of the Fed’s core mandates: keeping inflation near 2%.
- But tariff-related inflation is somewhat of a one-off shock: it doesn’t stem from over-tight demand or wages — so, if tariffs are removed or global trade normalizes, prices may cool. The Fed appears to be banking on that scenario.
That uncertainty explains the “hawkish” posture despite the cut: the Fed doesn’t want to slide back into complacency if tariffs continue to fuel price pressures.
How markets, households, and businesses are reacting
Markets: cautious optimism
- Stocks and bonds rallied modestly after the cut. Investors interpreted the move as a slight easing with a guarded path ahead.
- But the message from the Fed wasn’t “get ready for a boom” — it was “let’s see where we stand.” That keeps longer-term yields relatively elevated, and adds risk to rate-sensitive sectors like real estate and long-duration assets.
Consumers & borrowers: small relief, uneven gains
- Borrowing costs for mortgages, auto loans, and business loans may inch down. But with inflation still high (and maybe sticky), purchasing power gains will be modest. Some households will feel relief — especially those refinancing debt — while others (renters, workers facing stagnant wages) may still struggle.
- Savers, particularly those holding high-yield savings accounts or CDs, will likely see only marginal gains, as interest rates remain muted.
Businesses & hiring: cautious waiting
Lower borrowing costs can help businesses, particularly debt-heavy ones. But many firms may delay investment — waiting for clarity on inflation, demand and consumer spending. Hiring may recover slowly, if at all.
What to watch in 2026 — and what it means for ordinary people
| Watchpoint | Why it matters | Potential outcome |
|---|---|---|
| Tariff developments / trade policy | Tariffs are key driver behind sticky inflation | If tariffs are eased or lifted → goods inflation may cool; if not → inflation may remain elevated |
| Labor market data (wages, unemployment) | Fed weighs employment vs inflation | Prolonged weak hiring could prompt another cut; if jobs improve → rates may stay steady |
| Inflation metrics (CPI, PCE) | Show whether price pressures are underlying or shock-driven | Persistent underlying inflation → pressure on Fed to re-hike; transitory → further cuts possible |
| Corporate investment & consumer demand | Drive growth and hiring | Healthy demand → better jobs and wage pressure; weak demand → stagflation risk |
For households: keeping an eye on mortgage rates, consumer prices, and wage growth will matter most. For businesses: the cost of capital, demand outlook, and tariff exposure will shape decisions.
Why this matters beyond Wall Street
This December cut — and the Fed’s careful framing — reflects a broader challenge: central banks worldwide are being forced to navigate a world where trade policy, not just domestic demand or wages, shapes inflation.
In decades past, central bankers mostly worried about overheating economies. Now, trade wars, tariffs, global supply-chain disruptions — all external political decisions — can twist the economics of inflation and employment. That raises a fundamental question: should monetary policy alone bear the burden of stabilizing prices in a world where geopolitical trade policy plays an oversized role? The Fed seems to be answering: “We’ll do what we can — but it won’t fix everything.”
This matters globally, because U.S. interest-rate decisions ripple through markets, currencies and economies everywhere. For emerging markets (many sensitive to capital flows and dollar strength), the Fed’s cautious stance means continued uncertainty.
My take — Why this was a “hawkish cut,” and what comes next
From my years covering central banks, I’ve rarely seen a rate cut framed with such restraint. The Fed didn’t blush. It didn’t celebrate. It simply tilted the rate down — just enough to acknowledge softness, but not so much as to surrender to inflation.
If tariffs remain high, inflation may stay elevated. If trade eases and global supply chains settle, we might get relief. But there’s no guarantee — and the Fed knows it.
My view: 2026 will be a year of watchful wait-and-see, not aggressive easing. Unless there’s a sharp deterioration in employment, I expect the Fed to hold rates around 3.5–3.75% for much of next year. That means households and businesses need to stay lean, expect modest borrowing costs — but not assume a free ride.
In short: the Fed cut. But it’s still holding the reins.
FAQs
No — the Fed explicitly emphasised that inflation remains “elevated,” driven by goods-price increases, many tied to tariffs. The cut reflects concern over employment softness, not a claim that inflation is vanquished.
Probably not sharply. A 25 bps cut provides modest relief. Mortgage rates, auto loans, business credit may soften a bit — but inflation and risk concerns will keep borrowing somewhat costly.
Fed guidance and dot-plot signals suggest only one more 25 bps cut through 2026 — unless the economy deteriorates significantly.
If inflation resurges — especially due to tariffs or global supply shocks — possibly. The Fed has signalled it won’t hesitate to act if price pressures persist.
That could ease goods-price inflation, giving the Fed room to cut rates further — or at least hold them steady without aggressive tightening. But such a shift depends entirely on trade policy, which remains politically volatile.
