RSS Feed by Calculated Risk on 12/07/2025 11:50:00 AM
Sunday, December 07, 2025
FOMC Preview: 25bps Rate Cut Expected
Most analysts expect the FOMC to reduce the Fed Funds rate by 25bps at the meeting this week to a target range of 3-1/2 to 3-3/4 percent. Market participants currently expect two additional rate cuts in 2026.
Analysis suggests rates are currently slightly restrictive (Cleveland Fed) or even already accommodative (even before this rate cut). So, to cut rates in this environment, FOMC members are clearly expecting either inflation to decline quickly or an employment recession, or both. This outlook should show up in the projections (lower inflation, higher unemployment rate).
From Goldman Sachs:
The FOMC is widely expected to deliver a third consecutive 25bp interest rate cut to 3.5-3.75% at what will likely be a contentious December meeting next week. ... The case for a cut is solid, in our view. Job growth remains too low to keep up with labor supply growth, the unemployment rate has risen for three months in a row to 4.4%, other measures of labor market tightness have weakened more on average, and some alternative data measures of layoffs have begun to rise recently, presenting a new and potentially more serious downside risk.From BofA:
The Fed has signaled that it will cut rates by 25bp to 3.5-3.75% at its Dec meeting. We look for two or three substantive changes in the FOMC statement. The description of labor market conditions is likely to omit the language that the u-rate “remained low”, to reflect the 32bp uptick over the last three months.
...
The SEP is likely to show upgrades to growth in 2025 and 2026. ... However, as a mark-to-market based on the latest data, we think the u-rate for 4Q 2025 will be taken up by a tenth to 4.6%. ... These changes would provide some cover for cutting rates despite the expected upgrades to the growth outlook.
emphasis added
Projections will be released at this meeting. Here are the September projections.
1 Projections of change in real GDP and inflation are from the fourth quarter of the previous year to the fourth quarter of the year indicated.
The unemployment rate was at 4.4% in September. The unemployment rate will likely increase further this year. There was no data for October due to the government shutdown, and the November report will be released on December 16th - the week after the FOMC meeting - so the FOMC is flying blind this week on the unemployment rate. However, they will probably increase the 2025 projection (and possibly 2026) as justification for the rate cut. An unemployment rate of 4.6% over the next few months might be recessionary (according to the Sahm rule).
2 Projections for the unemployment rate are for the average civilian unemployment rate in the fourth quarter of the year indicated.
As of September 2025, PCE inflation increased 2.8 percent year-over-year (YoY), up from 2.7 percent YoY in August. Projections for PCE inflation will probably remain unchanged or lowered slightly.
PCE core inflation increased 2.8 percent YoY, down from 2.9 percent in August. Projections for 2025 core PCE inflation will likely be decreased.
The BEA's estimate for first half 2025 GDP showed real growth at 1.6% annualized. Most estimates for Q3 GDP are around 3.5%. That would put the real growth for the first three quarters at 2.2% annualized - well above the top end of the September projections. So GDP for 2025 will likely be increased.
| GDP projections of Federal Reserve Governors and Reserve Bank presidents, Change in Real GDP1 | ||||
|---|---|---|---|---|
| Projection Date | 2025 | 2026 | 2027 | |
| Sept 2025 | 1.4 to 1.7 | 1.7 to 2.1 | 1.8 to 2.0 | |
| Jun 2025 | 1.2 to 1.5 | 1.5 to 1.8 | 1.7 to 2.0 | |
The unemployment rate was at 4.4% in September. The unemployment rate will likely increase further this year. There was no data for October due to the government shutdown, and the November report will be released on December 16th - the week after the FOMC meeting - so the FOMC is flying blind this week on the unemployment rate. However, they will probably increase the 2025 projection (and possibly 2026) as justification for the rate cut. An unemployment rate of 4.6% over the next few months might be recessionary (according to the Sahm rule).
| Unemployment projections of Federal Reserve Governors and Reserve Bank presidents, Unemployment Rate2 | ||||
|---|---|---|---|---|
| Projection Date | 2025 | 2026 | 2027 | |
| Sept 2025 | 4.4 to 4.5 | 4.4 to 4.5 | 4.2 to 4.4 | |
| Jun 2025 | 4.4 to 4.5 | 4.3 to 4.6 | 4.2 to 4.6 | |
As of September 2025, PCE inflation increased 2.8 percent year-over-year (YoY), up from 2.7 percent YoY in August. Projections for PCE inflation will probably remain unchanged or lowered slightly.
| Inflation projections of Federal Reserve Governors and Reserve Bank presidents, PCE Inflation1 | ||||
|---|---|---|---|---|
| Projection Date | 2025 | 2026 | 2027 | |
| Sept 2025 | 2.9 to 3.0 | 2.4-2.7 | 2.0 to 2.2 | |
| Jun 2025 | 2.8 to 3.2 | 2.3-2.6 | 2.0 to 2.2 | |
PCE core inflation increased 2.8 percent YoY, down from 2.9 percent in August. Projections for 2025 core PCE inflation will likely be decreased.
| Core Inflation projections of Federal Reserve Governors and Reserve Bank presidents, Core Inflation1 | ||||
|---|---|---|---|---|
| Projection Date | 2025 | 2026 | 2027 | |
| Sept 2025 | 3.0 to 3.2 | 2.5-2.7 | 2.0 to 2.2 | |
| Jun 2025 | 2.9 to 3.4 | 2.3-2.6 | 2.0 to 2.2 | |
