What to Know About the Fed’s Third Interest Rate Cut in 2025

Last week, the Federal Reserve cut rates by 0.25%, bringing the policy rate range to 3.5% to 3.75%. This marked the third straight meeting where the Fed cut rates by 0.25%. Today's video will talk a little bit more about what the Fed decided, what to expect in 2026, and some implications for investors.

The Fed’s Dual Mandate

In terms of why the Fed decided to cut, it really all circles back to what's called the Fed's dual mandate, meaning that they have two different goals that they are looking to achieve, and sometimes those goals are at odds with one another.

Their first goal is stable prices. So, that can be essentially interpreted as trying to get inflation around their 2% long-run target. Their second goal is full employment, which can be interpreted as getting as many people employed as possible without causing inflation to run hotter than that 2% number.

Why the Fed Cut Rates Again

Last week, it was really more targeted at the labor portion of their mandate, in the sense that we have seen the labor market start to cool some. We've seen the economy adding fewer jobs on a month-over-month basis in recent months, and we have started to see the unemployment rate start to tick up as well. And so that's really why they decided to cut, and along with that, the inflation picture has started to moderate as well. It certainly isn't nearly as high as it was back in 2021 and 2022, although it's still well above the Fed's long-run 2% target.

In the projections that were released coming out of the meeting, Fed officials said they expect inflation to be around 2.4% by the end of 2026, which is slightly lower than the projections they had released in September.

Chair Powell also noted in his press conference that the Fed lacked some of the official economic data due to the government shutdown, and so, more than usual, they relied on anecdotal data and more private sector indicators.

What to Expect in 2026

In terms of what to expect in 2026, the Fed projected just one more rate cut in 2026, which was consistent with what they said in September. I would note, though, that markets are actually expecting two rate cuts next year. Financial conditions are already fairly easy, and lower rates could add more support to the economy in early 2026.

In terms of implications for investors, I think the key point is that markets adjust faster than the economic data, and staying disciplined to your long-term plan matters more than predicting the exact path of Federal Reserve policy. If you do have any questions on anything I've covered in today's video, please don't hesitate to reach out to your advisor.

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