Fed Cuts Benchmark Rate by 25 bps as Policy Easing Continues

The U.S. Federal Reserve’s policymaking arm, the Federal Open Market Committee (FOMC), has cut its benchmark interest rate by 25 basis points, bringing the federal funds rate down to a 3.50%–3.75% range in its final meeting of the year. This marks the third rate cut in a row for 2025, extending the shift away from the long stretch of unchanged policy seen last year.

Invest in Indian Markets and Unlock Future Potential With 5paisa!

Open Account Now

What the FOMC Decided

During its December meeting, the committee agreed to ease policy by lowering the key short-term rate by a quarter point. The adjustment pushes borrowing costs to their lowest level in roughly three years. The vote also reflected some internal differences, pointing to ongoing discussions over how quickly the Fed should continue easing.

The committee continues to work toward its long-standing goals: keeping employment strong and bringing inflation back toward its 2% target. Ongoing uncertainty in the economy, including mixed signals from the labour market and lingering price pressures, played a part in the committee’s decision to move ahead with another cut.

Reasons Behind the Move

Even though inflation has decreased from its post-pandemic peak, it is still above the Fed’s comfort zone. Meanwhile, recent reports indicate that the job market is losing some momentum. Hiring is slowing, and unemployment is rising slightly. If these trends continue, they could hurt spending and growth.

By trimming rates, the Fed aims to support activity across the economy. Lower borrowing costs usually help households and businesses by making loans cheaper. This can promote investment and spending when growth risks are rising.

Broader Policy Context

The December move comes after earlier cuts in September and October. Together, they show a consistent pattern of gradual easing after almost a year of maintaining high rates to control inflation. Those higher rates had been in place to cool demand, but with conditions shifting, the committee has been gradually adjusting its stance.

The Fed’s dual mandate - stable prices and maximum employment - guides these decisions. Changing the federal funds rate remains the main tool it uses to keep the economy on track.

The committee meets next in late January 2026, when it will get another round of key data on prices, job growth, and consumer spending. These figures will shape how the Fed views the early months of 2026.

Financial Market Response

Markets reacted quickly to the announcement, with noticeable shifts in stocks and bond yields. Rate changes often influence everything from borrowing costs to currency movements, and even widely anticipated decisions can trigger immediate adjustments across financial markets.