The Federal Reserve delivered its third straight interest rate cut of 2025, lowering the federal funds rate by 25 basis points to a range of 3.50%–3.75%. The decision was split, with some officials favoring no change and others pushing for a larger cut. Federal Reserve Chair Jerome Powell’s remarks highlighted the Fed’s cautious balancing act between supporting jobs and keeping inflation under control.
Labor Market and AI
Powell acknowledged that labor supply has fallen sharply, contributing to a cooling job market. He noted that artificial intelligence is “probably part of the story” behind layoffs and hiring freezes, but not the main driver. Despite recent weakness, Fed officials expect the labor market to stabilize or even improve in 2026, with unemployment projected to edge down from 4.5% to 4.4%.
Housing Challenges
Housing affordability remains a major issue. Powell admitted that a quarter‑point cut “won’t make much of a difference” for buyers, pointing to structural problems like limited supply and locked‑in mortgage rates above 6%. He emphasized that the Fed’s tools cannot solve a housing shortage.
Inflation and Tariffs
Inflation risks remain tilted upward, especially from tariffs. Powell said the Fed’s job is to ensure that a one‑time price increase does not become an ongoing inflation problem. He warned that tariff‑driven inflation could prove more persistent than expected, though he does not expect the labor market to tighten enough to reignite inflation.
Data Distortions
Powell cautioned that incoming data may be distorted due to the government shutdown in October and November, which delayed or canceled key reports. He said the Fed will cast a “skeptical eye” on CPI and household survey data until more reliable numbers arrive in January.
Growth Outlook
Despite near‑term risks, Powell sees reasons for optimism in 2026. Consumer spending has been resilient, AI‑related investment is holding up, and fiscal policy is expected to be supportive. The Fed projects GDP growth to accelerate from 1.7% in 2025 to 2.3% in 2026, alongside cooling inflation.
