The Federal Reserve delivered what everyone expected—a 25 basis point rate cut—but the drama unfolded in how they got there. Rates now sit at 3.5%–3.75% after the third consecutive reduction, but the December meeting revealed something more interesting than the cut itself: the central bank's internal consensus is fraying.

Three policymakers broke ranks, and not in a coordinated way. Governor Stephen Miran wanted to go bigger, voting for a 50-basis-point reduction. Meanwhile, Kansas City Fed President Jeffrey Schmid and Chicago Fed President Austan Goolsbee wanted to pump the brakes entirely, voting to hold rates steady. When three members dissent and they can't even agree on which direction to dissent, you know the Fed is navigating some choppy waters.

The rationale for the cut came down to labor market concerns. Despite inflation remaining stubbornly elevated above the Fed's 2% target, policymakers pointed to softening employment conditions as justification for easing borrowing costs. It's the classic Fed balancing act, except the tightrope keeps getting narrower.

The Guidance Got More Cautious

Here's where things get subtle but important. The Federal Open Market Committee tweaked its forward guidance in a way that signals a slower pace ahead. Back in September, the Fed said it would "carefully assess incoming data, the evolving outlook, and the balance of risks" when considering more adjustments. Standard central banker speak.

The new language shifts the conversation toward the "extent and timing" of future moves. That might sound like bureaucratic word salad, but it's actually meaningful. The Fed is essentially saying: we're still going to cut, probably, but we're going to think harder about how much and when. Translation: don't expect rate cuts to keep coming at this pace. Future reductions could be smaller, pushed further out, or spaced with longer gaps as officials grow more uncertain about what 2026 holds.

What The Dot Plot Says About The Road Ahead

The updated economic projections paint a picture of cautious optimism mixed with persistent inflation headaches. Growth expectations got a modest upgrade. Real GDP for 2025 ticked up to 1.7% from the September forecast of 1.6%. But the bigger revisions came further out: 2026 jumped from 1.8% to 2.3%, and 2027 rose from 1.9% to 2%. The longer-run trend holds at 1.8%.

The unemployment outlook barely budged. Policymakers kept the 2025 forecast at 4.5%, maintained 2026 at 4.4%, and made only a tiny adjustment to 2027, trimming it from 4.3% to 4.2%. So the labor market picture remains relatively stable in their view, at least on paper.

Inflation forecasts improved slightly but remain above target. PCE inflation for 2025 came down to 2.9% from 3%, while core PCE dipped to 3% from 3.1%. Both measures are projected to glide gradually toward the Fed's 2% target by 2028. The key word there is "gradually"—this isn't happening overnight.

Rate expectations stayed anchored to the September path: 3.6% in 2025, 3.4% in 2026, and 3.1% in 2027, with a longer-run neutral rate of 3%. Despite all the internal disagreement, the median forecast hasn't shifted, suggesting the committee's center of gravity is holding for now.

Powell Takes The Stage

Fed Chair Jerome Powell was scheduled to hold a press conference at 2:30 p.m. ET, and markets were listening closely. The last time Powell spoke at a press conference back on Oct. 30, he caught everyone off guard with unexpectedly hawkish comments.

More than a month ago, Powell made clear that "a further reduction in the policy rate at the December meeting is not a foregone conclusion, far from it." He emphasized that policy was not "on a preset course" and suggested the Fed needed to slow down while "driving in the fog" due to limited economic visibility.

Given how divided the committee has become, Powell's job is to explain how three people can look at the same data and come to three completely different conclusions—and somehow make it all sound reasonable. That's the art of central banking in 2025.