How much further will the Federal Reserve cut interest rates, and when will it stop? This question has Wall Street economists debating furiously as 2025 comes to a close. The Fed has already slashed rates three times this year, bringing the federal funds rate down from its 2023-2024 peak by a full 1.75 percentage points. After cutting 25 basis points in September, October, and December, the rate now sits at 3.5% to 3.75%.
The Federal Reserve has cut rates three times in 2025, reducing the federal funds rate by 1.75 percentage points to its current range.
The December cut matched what markets expected, even though Fed Chair Powell had made some hawkish comments earlier. The FOMC statement explained that the reduction supports maximum employment while keeping the Fed’s 2% inflation target in view. Officials acknowledged that the balance of risks had shifted enough to justify easing monetary policy. Such shifts often move markets quickly, with Treasuries one of the most sensitive asset classes.
Looking ahead to 2026, opinions vary widely. Goldman Sachs expects two more cuts coming in March and June, which would push rates down to a terminal range of 3% to 3.25%. Their chief economist believes the arguments for continued easing remain solid. Meanwhile, JP Morgan takes a more conservative stance, forecasting just one additional cut next year. They characterize the recent moves as mid-cycle adjustments rather than emergency measures.
The Fed’s own dot plot projections suggest another 50 basis points of cuts by the end of 2026, though individual participants disagree on the exact timing. BlackRock estimates rates will land around 3.4% by late 2026. However, Fidelity notes there is no broad support for near-term cuts unless jobs data weakens markedly. The Fed also announced it would stop running off its $6.6 trillion balance sheet at the start of December, with principal payments of mortgage-backed securities to be reinvested into Treasury bills.
Economic projections from December paint a moderately optimistic picture. GDP growth for 2026 was revised upward to 2.3%, while inflation forecasts improved. PCE inflation is expected to drop to 2.4% next year from 2.9% in 2025. Unemployment projections remain steady at 4.4% to 4.5%. The December meeting featured two dissents, with two members preferring to hold rates steady while Governor Miran pushed for a larger 50 basis point cut.
The critical factor determining January’s decision will be November jobs data released on December 16. If unemployment climbs above 4.5%, discussions about another quick cut could heat up fast.
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