Fed Delivers a 25 Basis Point Cut but Signals a Higher Bar for Any Additional Easing Next Year

The Federal Reserve cut interest rates on Wednesday, as was widely expected. Heading into the meeting, there was a roughly 90% probability of a cut to the federal funds rate priced into the markets.

The federal funds rate is now at a target range of 3.5%-3.75%, which is a quarter of a percentage point below the previous range. This is the third rate cut of 2025, which followed three rate cuts in 2024 as inflation eased from multi-decade highs.

A divided Fed

The federal funds rate is set by the Federal Open Markets Committee, or FOMC, which is the policy-making arm of the Federal Reserve. There are 12 voting members of the FOMC, and they typically agree on policy measures, save for a dissenter or two at some meetings.

Image source: Getty Images.

However, we learned that the FOMC is currently rather divided. It's been more than a decade since three of the voting members disagreed with the majority. Two called for no interest rate decrease at all, while another wanted a more aggressive cut of half a percentage point.

Future rate cuts could be more difficult

In addition to the unusually high presence of dissent, there are reasons to believe that any further rate cuts as we head into 2026 could face an uphill battle.

The FOMC added some carefully crafted language to its new statement, suggesting that the number of future rate cuts (if any) will be data-dependent.

Additionally, the Fed released its quarterly economic projections alongside today's rate decision. To the surprise of some investors, the median expectation is for just one rate cut in 2026 and another in 2027, which members anticipate will mark the end of the rate cut cycle.

Why is the stock market rallying?

In short, the Fed's statement, as well as Chair Jerome Powell's press conference, didn't have nearly as much of a hawkish or cautious tone as many investors had feared.

It's also worth noting that investors generally don't seem to be buying into the Fed's prediction of just a single rate cut for 2026. According to the CME FedWatch tool, which shows how interest rate possibilities are priced into financial markets, the median expectation is for two (not one) rate cuts next year, and there's a 69% chance of at least two cuts.

This could be partially due to significant weakening in economic data that we've seen recently, or the fact that we'll get a new Fed chair in a few months, among other reasons.

The Motley Fool has a disclosure policy.