Fed adjusts reference interest rate to 3.5-3.75%

On December 10, after a 2-day policy meeting, the Fed decided to reduce the reference interest rate by 25 basis points, to 3.5-3.75%. This decision matches market forecasts, and is the third time the agency has adjusted monetary policy this year.

“The economy is growing at a moderate pace, new job creation has slowed and the unemployment rate has inched up,” the Fed commented in an announcement after the meeting. This agency assesses that the outlook is increasingly uncertain, inflation has accelerated compared to the beginning of the year and remains at a high level. The Fed is expected to reduce interest rates only once per year for the next two years, by 25 basis points.

During this meeting, there were three officials who did not approve of the general decision, including board of governors member Stephen Miran, Chicago Fed President Austan Goolsbee and Kansas Fed President Jeffrey Schmid. Miran wants to reduce by 50 basis points, similar to previous meetings. Meanwhile, Goolsbee and Schmid want to keep interest rates unchanged.

After the Fed’s announcement, key US stock market indexes rebounded. The DJIA rose 0.6%, the S&P 500 added 0.3%, while the Nasdaq Composite was almost flat. World spot gold price increased by 8 USD to 4,213 USD per ounce.

The Fed’s reference rate applies to interbank overnight loans. This is not what consumers and businesses have to pay, but the Fed’s move will affect lending and savings rates. When interest rates are low, borrowing costs are cheaper, businesses can invest in new projects or hire more employees. Similarly, consumers spend more because savings are less attractive.

The Fed expects US GDP to grow by 2.3% next year, higher than the September forecast of 1.8%. At that time, the personal expenditure price index (PCE) – the agency’s preferred inflation measure – will also be only 2.4% and the unemployment rate will be 4.4%.

Data from financial services firm LSEG shows that investors currently forecast that the probability of the Fed keeping interest rates unchanged at the January 2026 meeting is 78%. This rate is higher than before the session.

After cutting interest rates three times in a row last year, the Fed stopped observing. Fed officials want to better assess US inflation and employment trends, especially after President Donald Trump announced a series of import tax policies. By mid-September, the Fed decided to reduce interest rates by 25 basis points (0.25%).

This caused the Fed and Chairman Jerome Powell to receive a lot of criticism from Mr. Trump. The US President continuously complained about the Fed’s monetary policy, saying that the agency was “late” in reducing interest rates and should have been more aggressive, because the US has “almost no inflation”.