2025 U.S. Interest Rate Cuts: Data-Driven Policy Shift and Risk Rebalancing by the Federal Reserve

Federal Reserve Cuts Rates, Bringing Interest Rates to a Three-Year Low

On December 10, 2025, the Federal Reserve announced at its meeting that it would lower the target range for the federal funds rate by 25 basis points to 3.50%–3.75%. This marks the third rate cut this year and the lowest level in the past three years. Although the market has speculated about the timing of rate cuts over the past few months, the real reasons for the policy shift have long been embedded in official language and economic data.

Figure 1: Federal Funds Rate Trends from 2023 to 2025 (Source: Federal Reserve FRED Database)

Slight Adjustments in Official Language, Rising Concerns Over Inflation and Employment

The Federal Reserve's policies have never been emotional but rather traceable. Since mid-year, the language in official documents has subtly changed: descriptions of inflation have become increasingly moderate, while attention to the labor market has continued to rise. Especially entering the third quarter, employment data showed a significant slowdown—data from the U.S. Department of Labor indicated that non-farm payrolls fell from 180,000 in July to 119,000 in September, with the unemployment rate rising to 4.4% as of September, causing the "risk balance" policy framework to begin to tilt.

Figure 2: U.S. Unemployment Rate Trends from 2019 to 2025 (Source: U.S. Department of Labor / FRED)

Rising Employment Risks Prompt Policy Rebalancing

In the latest decision, the Federal Reserve explicitly stated, "Recent employment growth has slowed, and the unemployment rate has risen slightly." This judgment is rare in recent times and indicates that the previously "very strong" labor market is now recognized in official statements as facing downward pressure. In contrast, although inflation remains above the long-term target of 2%, the 3.1% year-on-year growth of core PCE in November (Federal Reserve data) led to the official description being "still elevated," rather than more intense terms like "stubborn" or "persistently excessive." This difference in wording is sufficient to indicate that decision-makers' priorities regarding risks have changed.

In a sense, this rate cut represents a "rebalancing." After two years of tightening, high policy rates have begun to exert pressure on the economy—especially on businesses and consumers facing high financing costs. The Federal Reserve is not easing policy due to the complete disappearance of inflation but is compelled to adjust its pace in light of subtle changes in employment (with the September unemployment rate reaching 4.4%). This is not the "full easing cycle" that the outside world anticipated, but rather an action to find space between data and risks.

Figure 3: Core PCE Inflation Trends from 2019 to 2025 (Source: U.S. Bureau of Economic Analysis / FRED)

Interest Rate Adjustment Pace Remains Flexible, Future Depends on Economic Data

On the policy path, the Federal Reserve has maintained restraint. The statement repeatedly emphasizes that future interest rate adjustments "will depend on the latest data and risk assessments," rather than proceeding along a predetermined path. This open-ended expression reserves space for future flexible responses while also dampening market expectations for consecutive rate cuts and aggressive easing. In other words, the Federal Reserve has not committed to lower rates but hopes that each step of policy will follow actual economic changes.

Voting Discrepancies Reveal Different Judgments on Economic Outlook Among Decision-Makers

Additionally, the voting results of this FOMC meeting also convey a signal: 9 votes in favor, 3 votes against, marking a rare division in recent years. The dissenting opinions do not question the policy direction but reflect a lack of consensus among decision-makers regarding the economic outlook—Federal Reserve Governor Milan favors a 50 basis point cut, while Chicago Fed President Goolsbee and Kansas City Fed President Schmidt advocate for maintaining rates. This internal difference itself serves as a reminder: the Federal Reserve does not believe the current situation is clear enough to establish a single path, and future policies may adjust direction without presenting a coherent one-sided trend.

Market Focus on Risk Signals Behind the Timing of Rate Cuts

Overall, this rate cut is a response to economic realities rather than a reassurance to the market. Although inflation has not returned to target, the 3.1% growth of core PCE in November shows a sustained downward trend; the labor market remains robust but lacks the strength of the previous two years; economic growth remains resilient, but uncertainties persist. Under multiple constraints, the Federal Reserve's choice is a balanced adjustment: neither allowing the economy to be long-term pressured by high rates nor overly loosening policy to re-stimulate inflation.

For the market, the key information is not "the rate cut has occurred," but rather "why the rate cut happened at this time." The weight of the term "risk" in official documents has significantly increased, indicating that future decision-makers will rely more on data rather than expectations or verbal commitments, and the pace of policy will be more cautious.

Future Direction of Monetary Policy Driven by Data

This adjustment is both a cyclical milestone and an important signal, reflecting policymakers' detailed judgments about the economy and demonstrating efforts to maintain balance amid uncertainty. The future direction of U.S. monetary policy lies at the intersection of employment, inflation, and growth: for instance, if the unemployment rate rises to 4.5% in the first quarter of next year (close to the Federal Reserve's median forecast for the end of 2025), the pace of rate cuts may accelerate; if core PCE rebounds above 3.5%, the policy may even pause easing. Each change in data will become a key determinant of the next interest rate trend.

Read the original article