On December 10, the Federal Reserve (Fed) reduced the federal funds rate by 25 basis points, from a range of 3.75% – 4.00% to a range of 3.50% – 3.75%.
The federal funds rate is the interest rate at which banks lend reserve balances to each other overnight. It is a key tool used by the Federal Reserve to influence monetary policy and economic activity in the United States.
The federal funds rate is set by the Federal Open Market Committee (FOMC), which is the part of the Federal Reserve System that makes decisions about U.S. monetary policy, including setting interest rates and managing the money supply. It typically meets eight times a year to assess economic conditions and determine the appropriate policy actions. Their next meeting is scheduled for January 27-28, 2026.
The FMOC consists of twelve members:
- Seven members of the Federal Reserve Board, including the Chair and Vice-Chair.
- The president of the New York Fed, who is a permanent voting member.
- Four presidents from the other eleven Federal Reserve Banks, serving one-year terms on a rotating basis.
The Fed has lowered interest rates three times in 2025. Here is the 12-month history of rate changes:
DATE RATE RANGE
December 2024 4.25% – 4.50%
September 2025 4.00% – 4.25%
October 2025 3.75% – 4.00%
December 2025 3.50% – 3.75%
The reason why we pay so much attention to these rate changes is that they have a significant influence on several economic factors, including:
- Consumer Loan Rates: Affects interest rates on mortgages, credit cards, and personal loans.
- Economic Growth: Lower rates can stimulate borrowing and spending, while higher rates can help control inflation.
- Market Reactions: Investors closely monitor changes in this rate as it impacts stock market performance and overall economic sentiment.
Even though there is always some reaction to what the Fed does with interest rates, most of the time those reactions are minor initially because they have been anticipated and factored in. The December case is no exception. For example, banks have been reducing the interest they pay to their CD customers in anticipation of this rate decrease. Conversely, stocks have been gaining as they factor in the increase demand and the possible economic boost that a rate reduction entails.
Decisions regarding the setting of federal funds rates used to be almost always unanimous. Dissensions have been rare. But lately split decisions have become more common. The December 10 decision to lower the rate had three dissenters.
Two members wanted to keep rates steady: Chicago Fed president Austan Goolsbee and Kansas City Fed president Jeff Schmid.
One member wanted a larger (50 basis points) rate cut: Fed governor Stephen Miran.
The job of the FMOC was made much more difficult this time around because of the government shutdown. Many of the government statistics that the FMOC relies on to make decisions were not available.
The Federal Reserve System has a dual mission of encouraging full employment and maintaining inflation to no higher than 2%. During the first half of 2025 we experienced a modest but steady decline on the rate of inflation. But in June the trend reversed and there has been a steady increase through September, when the rate had bounced back to what it was in January, 3.0%. We do not have the official numbers for October and November.
In his remarks following the December meeting, Fed Chairman Jerome Powell indicated that he and other members of the Fed have been shifting their emphasis from controlling inflation to stimulating job growth despite increasing inflation rates. They are doing this on the assumption that those increases are the result of Trump’s tariff “inflation overshoot” and represent only a “one time” increase in prices.
It will be interesting to see what the Federal Open Market Committee does about interest rates at their meeting in January, when they will have access to a more complete set of data and a much clearer idea of the state of the economy.
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