• The Federal Reserve is expected to cut the federal funds rate by 25 basis points to a 3.50%-3.75% range at its December 10 meeting.
  • The move represents a policy pivot, with the central bank shifting focus from combating inflation to addressing persistent labor market weakness.
  • Economists see multiple further cuts ahead, with the rate potentially falling to nearly 3% by end-2026, though tariff-driven price pressures complicate the outlook.

Policy Shift Underway

The Federal Reserve is widely expected to lower borrowing costs next month, with 80 of 105 economists in a recent poll forecasting a 25 basis-point cut that would bring the benchmark rate to a 3.50%-3.75% range. This would mark the second consecutive cut following September's reduction to 4.0%-4.25%, which itself was the first cut since December 2024.

The anticipated December 10 move signals a definitive shift in the Fed's priorities. "The calculus has changed dramatically," said one economist familiar with central bank thinking. "Payroll revisions and rising long-term unemployment have tipped the scales toward supporting employment, even with inflation still above target."

Conflicting Economic Signals

Recent economic data presents a complicated picture for policymakers. The U.S. Treasury yield curve has dropped approximately 150 basis points since June, indicating strong market expectations for continued monetary easing through 2026. This would likely translate into lower borrowing costs across the economy, with 30-year mortgage rates potentially falling from current levels around 6.35% to approximately 5%.

However, tariffs imposed under recent trade policies have created persistent inflationary pressures that complicate the Fed's balancing act. These same tariffs have bolstered federal tax revenue—the Congressional Budget Office projects they'll contribute to a $4 trillion budget deficit reduction over the coming decade—but they've also made goods more expensive for American consumers.

Narrow Path to Soft Landing

Fed officials face what analysts describe as a "narrow path" to achieving a soft landing. The central bank must provide sufficient stimulus to prevent further labor market deterioration without reigniting inflation that has proven more stubborn than anticipated.

Economic policy uncertainty remains elevated, driven by shifting trade policy and what one market participant described as "fragile" labor conditions. The situation is further complicated by ongoing data challenges, with some economic releases delayed by government shutdowns and reporting issues.

Multiple sources indicated that unless jobs data shows dramatic improvement before the December meeting, a rate cut appears almost certain. The Fed did not immediately respond to a request for comment on the poll results or its December plans.

Looking beyond December, analysts expect at least one additional cut in 2025, with the federal funds rate potentially approaching 3% by the end of 2026. The exact trajectory will depend on whether the labor market shows signs of rebounding and how quickly tariff-related inflation subsides.

Correction: An earlier version of this article misstated the number of economists forecasting a rate cut. It is 80 of 105 economists.