Federal Reserve expected to cut interest rates as disagreement among officials grows
- The US Federal Reserve is expected to cut the policy rate at the last meeting of 2025.
- The revised Summary of Economic Projections and Fed Chair Powell’s comments will be key as a rate cut is largely priced in.
- The US Dollar could stay on the back foot unless the Fed delivers a hawkish surprise.
The United States (US) Federal Reserve (Fed) will announce its interest rate decision on Wednesday, with markets widely expecting the US central bank to deliver a final 25 bps cut for 2025. While the move is widely priced in, this may be overshadowed by the vote itself as dissent within the Committee is anticipated from both hawks and doves.
Along with its interest rate decision, the Fed will also publish the Monetary Policy Statement, alongside the revised Summary of Economic Projections (SEP), following the December policy meeting on Wednesday.
The CME FedWatch Tool shows that investors are pricing in about a 90% probability of a 25 bps reduction in December to the 3.5%-3.75% range, but see a high likelihood of a policy hold in January. The last SEP, published in September, showed that policymakers’ projections implied a 25 bps reduction in 2026.
According to a recently-conducted Reuters poll, 89 of 108 economists have predicted that the Fed will opt for a 25 bps cut in December. Additionally, half of the polled economists saw the US central bank cutting the policy rate by another 25 bps to the range of 3.25%-3.5% in the first quarter of 2026.
While economists expect modest revisions in the growth and inflation projections, the market’s attention will be on Fed Chair Jerome Powell’s words and tone, which will try to reflect the divergent opinions of a deeply divided committee.
In the post-meeting press conference, Powell will also likely be asked about his potential successor next year, US President Donald Trump’s chief economic adviser Kevin Hassett. Markets expect Hassett to steer the policy towards a looser path if chosen as the new chair.
TD Securities analysts see the Fed adopting a hawkish tone after cutting the policy rate.
“We expect the FOMC to cut another 25bp. The decision to remain on an easing path will be equally or more contentious than October's, and we look for the final rate cut of the year to result in decidedly more hawkish guidance. We expect the Board at large to fully support the decision to ease in December, while hawkish regional Fed presidents are likely to show dissent,” they explain.
When will the Fed announce its interest rate decision and how could it affect EUR/USD?
The Fed is scheduled to announce its interest rate decision and publish the revised SEP at 19:00 GMT. This will be followed by Fed Chair Jerome Powell's press conference starting at 19:30 GMT.
The rate decision itself is unlikely to trigger a significant market reaction, but the voting pattern could be important as it could highlight a division of opinion among policymakers. In case the rate cut is decided with a slim majority, the USD could stay resilient against its peers, causing EUR/USD to stretch lower.
Investors will also scrutinize the details of the SEP. In case new projections point to at least two or more rate cuts next year, this could be assessed as a sign of a looser policy moving forward and hurt the USD. Conversely, the USD could gather strength and drag EUR/USD lower if the SEP shows a single cut in 2026, which is what the September SEP showed.
In the post-meeting press conference, Chair Powell’s remarks on inflation dynamics, the labor market and the policy outlook will be watched closely. Although Powell is unlikely to comment on his potential replacement, he could warn against prematurely cutting rates and help the USD hold its ground. Furthermore, Powell’s tone could be seen as hawkish if he adopts an optimistic tone about the labor market, while emphasizing the possibility of inflation rising again or not falling as anticipated.
On the flip side, the USD could come under renewed selling pressure and open the door for a leg higher in EUR/USD in case Powell voices his concerns about worsening conditions in the labor market, citing the concerning trend seen in private sector payrolls. Earlier this month, the Automatic Data Processing (ADP) reported that private employers shed 32,000 jobs in November.
Commenting on the potential impact of the Fed event on the USD’s valuation, “we expect the December Fed meeting to bring a hawkish Fed cut which could see the recent USD selloff take a momentary breather,” say TD Securities analysts. “Beyond that, we continue to see a moderation in the USD sentiment and continued weakness. Our quant macro framework's trading weight in the Dollar is also moderating from a combination of market and macro factors,” they added.
Eren Sengezer, European Session Lead Analyst at FXStreet, provides a short-term technical outlook for EUR/USD:
“EUR/USD clings to a bullish stance in the short-term outlook, as it manages to hold above the 20-day, 50-day and 200-day Simple Moving Averages (SMAs). Additionally, the Relative Strength Index (RSI) indicator stays near 60 on the same chart.”
“The 100-day SMA aligns as a pivot point near 1.1650. Once that level is confirmed as support, bulls could show interest. In this scenario, 1.1730 (static level) could act as an interim resistance level ahead of 1.1918 (September 17 high). On the downside, the Fibonacci 23.6% retracement level of the January-September uptrend and the 200-day SMA form a key support level area at 1.1480-1.1460 ahead of 1.1240 (Fibonacci 38.2% retracement).”
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.
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FXStreet Team
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