FOMC's Third Rate Cut This Year Takes Effect: Seeking a Path to Economic Balance Amid Divisions

On December 10 (local time), the Federal Open Market Committee (FOMC) concluded its two-day monetary policy meeting and announced a 25-basis-point cut in the target range for the federal funds rate to 3.50%—3.75%. This decision marks the third consecutive rate cut since September 2025 and the sixth move in the current rate-cutting cycle that began in September 2024, signifying the Federal Reserve's continued efforts in the complex game of balancing economic growth, employment stability, and inflation control. However, the 9:3 voting result—with 1 member advocating for an aggressive 50-basis-point cut and 2 favoring keeping rates unchanged—also highlights that divisions within the Federal Reserve over the future policy path have reached a multi-year high.

Behind this rate cut lie multiple pressures and uncertainties facing the U.S. economy. The latest economic data shows that while U.S. economic activity maintains a moderate expansion trend, signs of cooling in the job market have become increasingly evident. The employment cost index for the third quarter fell to a four-year low of 3.5% year-on-year, and private-sector employment unexpectedly decreased by 32,000 in November, the largest drop in nearly two and a half years. The unemployment rate has also gradually climbed from its mid-year low. Household consumption, a core driver of the economy, has shown signs of weakness. Coupled with inflation that, although down from its peak, remains above the 2% long-term target, this combination of "slowing growth + high inflation" has forced the Federal Reserve to continue using accommodative policies to prop up the economy. In a post-meeting press conference, Powell admitted that current interest rates are at the upper end of the neutral range, and the rate cut aims to stabilize the labor market while creating conditions for inflation to return to the target.

The 9:3 voting split profoundly reflects differing considerations within the Federal Reserve regarding policy priorities. The mainstream faction supporting the 25-basis-point cut this time believes that gradual easing can not only address the downside risks in the job market but also avoid exacerbating inflationary pressures through excessive rate cuts, preserving flexibility for policy adjustments. In contrast, Federal Reserve Governor Stephen Milan voted against the decision for the third consecutive time, advocating for a one-time 50-basis-point cut. His core argument is that the weakness in the job market is far more severe than reflected in official data, and more robust policy support is urgently needed to boost economic vitality. On the other hand, Austan Goolsbee, President of the Federal Reserve Bank of Chicago, and Jeffrey Schmid, President of the Federal Reserve Bank of Kansas City, favored keeping rates unchanged. They are more concerned that continued rate cuts may extend the inflation cycle and even fuel asset bubble risks, particularly remaining highly vigilant about potential bubbles behind the current AI investment boom.

The policy signals released at the meeting have formed a clear echo with market reactions. The FOMC statement included a new phrase: "will consider the extent and timing of further interest rate adjustments." This wording, which first appeared in December 2024, was interpreted by the market as a "hawkish" signal that the Federal Reserve may pause subsequent rate cuts. The dot plot data shows that officials' expectations of one rate cut each in 2026—2027 remain unchanged, suggesting that future policy will enter a wait-and-see period. The market responded quickly: the U.S. dollar index fell 0.60% to 98.64 on the day, and the 10-year U.S. Treasury yield closed at 4.155%; the three major U.S. stock indexes closed higher collectively, with the Dow Jones Industrial Average rising 1.05%; the precious metals market performed strongly, with spot gold closing at $4,228.55 per ounce and spot silver even hitting a record high of $61.81 per ounce.

Looking ahead, the Federal Reserve's policy path still faces multiple constraints. On the one hand, inflationary pressures have not yet fully subsided. Powell pointed out that while tariff-free core inflation has improved, commodity inflation is expected to peak in the first quarter of 2026 without new tariffs, which limits the room for further rate cuts. On the other hand, Federal Reserve Chairman Jerome Powell will step down in May next year, and there is uncertainty about the policy tendencies of his successor. U.S. President Trump has clearly taken support for rate cuts as a "litmus test" for candidates, while leading candidate Kevin Hassett, although believing there is room for rate cuts, also emphasizes that decisions must be based on data. In addition, the structural impact of the AI investment boom on the job market, U.S. government debt pressure, and the external environment of global economic slowdown will all increase the complexity of policy formulation.

This FOMC rate cut is not only a response to the current economic situation but also reflects the dilemmas of monetary policy among major global economies in the post-pandemic era. Caught between the balance of growth and inflation, and under the dual tests of internal divisions and external pressures, every decision of the Federal Reserve will profoundly affect global liquidity trends and financial market stability. For the market, instead of obsessing over the number of subsequent rate cuts, it is better to focus on whether the pace and intensity of policy adjustments can accurately match changes in economic fundamentals—that is the core of interpreting the Federal Reserve's policy logic.