At its final meeting of 2025, the Federal Reserve (Fed) announced it would once again cut rates by 25 basis points after doing so in September and October, shifting the federal funds rate to a target range of 3.5% to 3.75%.¹

Fed Chairman Jerome Powell cited that there are risks to both sides of the Fed’s dual mandate of lower inflation and maximum employment, but that the larger of the two is recent weakness in the labor market. Powell explicitly mentioned that Fed estimates suggest jobs growth over the summer months could have been lower than initially reported. For that reason, the committee judged that another interest rate cut was appropriate.²

Notably, not all Fed committee members came to a consensus on slashing rates: Two voters, regional Fed Presidents Austan Goolsbee (Federal Reserve Bank of Chicago) and Jeffrey Schmid (Federal Reserve Bank of Kansas City), preferred to hold rates steady, while another, Governor Stephen Miran, voted in favor of a 50-basis-point reduction, illustrating the differing opinions over the path forward for Fed policy.³

The Fed’s December meeting was widely anticipated, as the U.S. economy is seemingly at a crossroads. Inflation, which is still elevated, has created an affordability crunch for many Americans. At the same time, economic data was stalled by the latest government shutdown, leaving Fed policymakers with an incomplete picture of current economic conditions.

What did our strategists learn from the December Federal Open Market Committee (FOMC) announcement?

Powell acknowledged that while inflation has gone down significantly from its 2022 peak, it remains above the Fed’s 2% goal.⁴ And with no new government inflation data available since October, officials have had to rely on private-sector indicators and longer-term trends. Price pressures in the goods sector remain elevated due to the impact of tariffs, while inflation in the services sector continues to cool.

Powell also noted that labor market conditions have become somewhat softer than earlier in the year. Both layoffs and hiring remain relatively low, but the unemployment rate has gradually climbed to 4.4%, and the Fed sees greater risk that the job market could weaken further in the months ahead.

However, despite citing near-term labor market weakness, the Fed statement added language around “the extent and timing”⁵ of additional rate adjustments, signaling that the pace of cuts from here is likely to slow. This is, in part, reflected in the Fed’s December Summary of Economic Projections, which aggregates the projections for individual Fed officials on economic indicators in the coming years.⁶ For year-end 2026, the median expectation for real gross domestic product (GDP) growth rose to 2.3% versus 1.8% in September 2025, while the median estimate for the unemployment rate was unchanged at 4.4% and the median estimate for core personal consumption expenditures (PCE) inflation declined slightly to 2.5% versus 2.6% in September 2025. Powell mentioned during his press conference that he sees the Fed as being in a good position to wait and see how the economy evolves.

Elyse Ausenbaugh, Head of Investment Strategy for J.P. Morgan Wealth Management, holds a similar view.

“These last few policy rate moves have been justifiable as insurance cuts and the changes to the statement language align with how we are thinking about the path ahead,” Ausenbaugh said. “Unless the backdrop deteriorates meaningfully, we shouldn’t expect more than maybe one additional cut by the middle of next year.”

How did markets react to the December rate cuts?

U.S. equity markets moved slightly higher after the Fed announced its rate cut, as investors welcomed signs that the central bank seems more inclined to cut rates in the future to combat weakness in the labor market.

In the U.S. Treasury market, the response was generally lower yields. This was mostly driven by investors seeing Powell’s focus on weakness in the labor market, confidence on further inflation progress and less concrete consensus on a January pause on interest rate cuts.⁷

Could the next Federal Reserve chair selection process affect future rate cuts?

Heading into the meeting, another layer of uncertainty was the growing speculation that President Donald Trump could name his candidate for Fed chair to replace Powell once his term ends in May 2026. At the moment, Kevin Hassett (the current director of the National Economic Council, which advises the president on economic policy) is viewed as the frontrunner for the job.⁸

The prospect of Hassett leading the Fed has sparked mixed reactions among economists and investors. Supporters argue that his pro-growth stance could help accelerate a deeper rate-cutting cycle, while critics worry the possibility of a more politically aligned Fed chair could compromise the central bank’s long-standing independence and increase the risk of higher inflation.⁹

What does the Fed’s announcement mean for investors?

Overall, the Fed’s decision to cut rates by another 25 basis points indicates a higher bar for future rate cuts, which signals to investors that the Fed is likely closer to the end of its cutting cycle in the near-term.

“The Fed thinks its policy rate is back in the range of neutral; the growth outlook looks solid, but inflation is still too high,” Ausenbaugh said. “Pausing makes sense, but politics could renew pressure and uncertainty in the new year.”

With the Fed having already cut interest rates by 75 basis points in 2025 and likely to maintain bias toward slashing rates in 2026, investors could revisit the rate-cut playbook for investing, which includes:

• Locking in higher yields: As the Fed cuts rates, cash-like holdings, including savings accounts, certificates of deposit (CDs) and money market funds, will likely trend lower over time. Our strategists favor highly rated corporate bonds and municipal bonds in this environment.
• Positioning for equity upside: U.S. stocks historically perform well during non-recessionary Fed cutting cycles, especially when the economy stays resilient. Lower rates can support equity valuations and improve corporate earning potential if economic growth remains healthy.
• Adding portfolio protection: To guard against risks like higher-than-expected inflation or renewed market volatility, consider assets like gold and derivatives that can be structured to provide downside protection while maintaining exposure to potential market upside.

As always, consult a J.P. Morgan advisor to learn how these developments could affect your investing portfolio.