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A Rate Cut That Nearly Did Not Happen

Newly released minutes from the Federal Reserve’s December meeting show just how divided policymakers were before approving the latest interest rate cut. While the final decision appeared decisive on paper, internal discussions reveal the outcome was far closer than the vote tally suggested.

The Federal Open Market Committee voted 9–3 to lower rates by a quarter percentage point at its December 9–10 meeting, cutting the federal funds rate to a range of 3.5 percent to 3.75 percent. It marked the most dissenting votes on a rate decision since 2019 and underscored growing disagreement over how aggressively the Fed should respond to cooling inflation and softening labor conditions.

Inflation Progress Meets Lingering Doubts

Most policymakers agreed that further rate cuts could be justified if inflation continues to decline as projected. However, the minutes show a meaningful split on timing and magnitude. Several officials argued that even after cutting rates in December, it may be prudent to keep policy unchanged for a prolonged period.

Some participants expressed concern that inflation progress in 2025 had stalled, warning that cutting too quickly could undermine the Fed’s long term goal of returning inflation to 2 percent on a sustained basis. Others countered that delaying further adjustments could increase risks to employment as economic momentum slows.

This tension left some members describing the December decision as finely balanced, with a few acknowledging they could just as easily have supported no change at all.

Economic Outlook Remains Mixed

Fed officials broadly agreed that the US economy continues to expand at a moderate pace, but they disagreed on the balance of risks. The minutes highlight concerns about downside pressure on employment alongside upside risks to inflation, a combination that complicates policy decisions.

Recent data has added to the ambiguity. Hiring has slowed but layoffs remain contained, suggesting labor market cooling rather than deterioration. Inflation has eased gradually but still sits above the Fed’s 2 percent target, reinforcing caution among more hawkish members.

Meanwhile, economic growth has been notably strong. Gross domestic product surged at a 4.3 percent annualized rate in the third quarter, exceeding expectations and outperforming the already robust second quarter.

Markets React, Rate Expectations Shift

Markets showed a muted response following the release of the minutes. Stocks edged slightly lower, while traders modestly increased expectations for another rate cut as early as April.

The December meeting also included an update to the Fed’s Summary of Economic Projections. The so called dot plot showed that most of the 19 participating officials expect one additional cut in 2026 and another in 2027. If realized, that path would bring the policy rate close to 3 percent, a level many policymakers view as neutral.

Trade Policy and Inflation Pressures

Officials also discussed the inflationary effects of tariffs implemented under President Donald Trump. While policymakers generally agreed that tariffs were contributing to higher prices, most viewed the impact as temporary and expected it to fade into 2026.

Still, for officials already worried about stalled inflation progress, trade related price pressures added another reason to slow the pace of future rate cuts.

Data Gaps Add to Uncertainty

One complicating factor is data reliability. Several reports remain incomplete or delayed due to the recent government shutdown, forcing policymakers to interpret trends with caution. Even more current data is being treated carefully, as gaps may distort the true state of the economy.

As a result, expectations are growing that the Fed will remain on hold for the next several meetings while officials wait for clearer signals.

A Changing Committee Dynamic

The Fed’s internal balance is also set to shift. Four new regional bank presidents will rotate into voting roles, potentially altering the policy outlook. Incoming voters include Cleveland’s Beth Hammack, who has opposed further cuts, Philadelphia’s Anna Paulson, Dallas’s Lorie Logan, and Minneapolis’s Neel Kashkari, all of whom have expressed varying degrees of concern about easing policy too quickly.

Their views could make consensus harder to achieve in future meetings.

Bond Buying Returns to the Agenda

Alongside the rate decision, the committee also voted to restart bond purchases focused on short term Treasury bills. The program began with roughly $40 billion in monthly purchases aimed at stabilizing short term funding markets.

The Fed’s balance sheet currently stands near $6.6 trillion, down about $2.3 trillion from its peak. Officials warned that without renewed purchases, reserves could fall below levels considered sufficient for smooth banking system operations.

What the Minutes Ultimately Signal

The December minutes paint a picture of a central bank navigating a narrow path between inflation control and economic support. While the Fed did cut rates, the depth of internal disagreement suggests future decisions will be more cautious, data dependent, and politically sensitive.

For markets and households alike, the message is clear: the easing cycle is no longer straightforward, and the next move will depend on whether inflation convincingly cools without derailing growth.