The Fed cut its key interest rate by 0.25 of a percentage point after the Federal Open Market Committee (FOMC) meeting that ended December 18, bringing the target for the federal funds rate to a range of 4.25% to 4.50%.
While investors were broadly anticipating this cut, there’s also been a growing sense in markets that the Fed might be nearing a slowing or pausing point. Plus, fewer rate cuts than some investors and consumers had previously been hoping for might be on the table in 2025.
Read on for 5 takeaways from the Fed’s meeting and what it might mean for you.
1. What happened at the December Fed meeting and why?
The Fed has made it clear in recent months that it wants to ease off on the level of “restrictiveness” in its policy.
High rates effectively put the brakes on the economy (i.e., “restricting” the economy). Slowing the economy can help slow down inflation, but there’s always a risk of slowing it too much—thereby damaging economic growth and causing an increase in unemployment. The Fed’s aim has been to slow the economy just enough to subdue inflation, but then to ease off the brakes before the economy loses its positive momentum.
Even after rate cuts at the Fed’s previous 2 meetings, interest rates were still high enough to be considered restrictive. The central bank has sent consistent signals in recent months that it wants to gradually move closer toward a neutral stance—with “neutral” meaning an interest rate at a level that neither accelerates nor slows the economy.
“This decision was just one more step in the direction of neutral,” says Andrew Garvey, the lead monetary policy analyst on Fidelity’s Asset Allocation Research Team.
2. Where might interest rates go in 2025?
The Fed typically avoids committing itself to a future course of action, since it needs to stay nimble to respond to any economic events that might unfold. But at this meeting it did release an updated set of economic projections, including a freshly revised dot plot—a key chart that shows how FOMC members believe rates may evolve in the next year and over the longer term.
The dot plot showed that a median of Fed members expect the fed funds rate to fall to a range of 3.75% to 4.0% by the end of 2025 (an increase from the previous dot plot, when a median of members expected the fed funds rate to fall to 3.25% to 3.5% by end of 2025). That estimate would imply 2 more cuts of a quarter of a percentage point at some point over the 8 meetings it will hold in 2025.
That said, those dots represent personal estimates of individual members rather than a commitment from the Fed itself. And they don't give any insight into the exact timing of any further rate cuts.
3. Why might the Fed slow or pause rate cuts?
It's still too soon to know exactly how a slowdown in rate cuts or eventual pause may unfold.
A key reason for this uncertainty is that the Fed itself doesn't know exactly where the "neutral" level of interest rates is, says Kana Norimoto, the macro strategist on Fidelity's fixed income research team who covers the Fed. Unlike, say, the interest rate on 10-year Treasurys, the neutral interest rate isn't something that can be observed or measured in the economy.
"The neutral rate now is likely higher now than it was pre-COVID, due to factors such as deglobalization, demographics, and higher fiscal deficits," says Norimoto. "The Fed does not want to risk cutting too much and overshooting the neutral rate, which could trigger a reacceleration of inflation."
Pausing at some point may be important so that policymakers can step back and see how the economy is really doing, and how it's interacting with the current level of interest rates. The Fed has a “dual mandate” of keeping inflation low and stable, and also keeping unemployment low. Unemployment weakened over the summer—triggering worries that rates were too high—but has seemed to stabilize since then. While inflation has fallen significantly from its 2022 highs, progress in getting it all the way back down to 2% seems to have slowed or even stalled. The Fed’s preferred inflation measure, the Personal Consumption Expenditures Price Index excluding food and energy (aka “core PCE”), has hovered in the 2.5% to 3% range in recent months. And inflation has been starting to tick back up as a top worry among consumers.
4. Will the change in administration affect interest-rate policy?
Although a new presidential administration often brings change to many government agencies, the Fed is set up to be more independent—for example, by reporting to Congress rather than to the president.
Chair Jerome Powell’s term as chief of the central bank doesn’t expire until May 2026. Members of the Fed’s Board of Governors are appointed by the president for 14-year terms, with 1 seat typically coming up for appointment every 2 years. This structure helps provide a level of continuity to the Fed's policy and makes it unlikely that a change in administration triggers a significant shift in approach.
That said, the incoming Trump administration is generally expected to make some significant policy shifts—the exact details of which are still unknown—many of which could have ripple effects through the broader economy. So the Fed is likely to pay close attention to any policy changes that might impact the outlook for inflation or unemployment.
5. What might it mean for you?
Interest rates might not end up falling as much as some investors and consumers had been hoping—at least, not for now.
Falling rates, and the prospect of more rate cuts ahead, have generally helped support the stock market in recent months (lower interest rates can help businesses grow, supporting profit growth, and can also help buoy stock valuations like price-earnings ratios). If investors start expecting fewer, rather than more, rate cuts ahead, it could potentially weigh on the market’s momentum.
On the plus side, a pause in rate cuts could mean investors can keep earning a reasonable yield on investments like short-term CDs and money markets—even if those yields are lower than they were a year ago. And, of course, keeping the economy, inflation, and unemployment on a stable trajectory can have widespread benefits.