A 25bps cut and liquidity boost trigger a relief rally

19 Dec 2025 , 12:05 PM

The Federal Open Market Committee (FOMC) lowered the target range for the federal funds rate by ¼ percentage point, to 3.50%-3.75%, at its December 10, 2025, meeting. The cut had been widely expected, yet investors were concerned about the path forward. The vote was 9-3 in favor of a 25 bps cut; one of the voters voted for a 50bps rate cut and the remaining dissenters voted instead to keep rates unchanged. 

Despite a pick up in inflation, an uncertain economic outlook and rising unemployment risks were both specifically mentioned as part of the rationale for the rate cut. Considering its dual mandate of maximum employment and 2% inflation, the FOMC acted to lower the fed funds rate. 

The FOMC decision was largely as expected. Yet, the liquidity boost that was announced along with the cut prompted a relief rally in U.S. stocks. Rate-sensitive and small caps surged. Asian markets were mixed, however. Tech-heavy markets such as Taiwan and Korea were lower as an underwhelming result from Oracle fed into broader concerns around stretched AI valuations. 

Table: Key directives 

Item	Directive
Federal Funds Rate Target range	Set the target range at 3.50 – 3.75% through open market operations.
Repo	Minimum 3.75%; no aggregate limit.
Reverserepo	Rate offered 3.50%; per‐counterparty cap $160 billion per day.
Treasury rollover	At auction, roll all principal payments to Treasury Bills.
Agency debt/MBS reinvestment	Reinvest all principal paid into treasury bills.
Primarycredit rate	Cut to 3.75%

Source: FOMC Press Release 

Figure: History of Fed Funds Target and Effective Rate 

Source: FRED 

Key Quotes From The Press Conference 

On Inflation 

1. Inflation has eased significantly from its highs in mid-2022 but remains somewhat elevated relative to our 2 percent longer-run goal.  

1. The readings are higher than earlier in the year as inflation for goods has picked up, reflecting the effects of tariffs. In contrast, disinflation appears to be continuing for services. 

1. The median projection in the SEP for total PCE inflation is 2.9 percent this year and 2.4 percent next year, a bit lower than the median projection in September. Thereafter, the median falls to 2 percent. 

On Growth, Consumer Spending and Business Investment 

• Recent indicators point to continued growth of the economy, though at a slower pace. Consumer spending seems to have remained solid, and business fixed investment has continued to expand. The one-time hit to economic activity from the partial closure of the federal government probably weighed on growth in this quarter, but that drag should be mostly offset by higher growth next quarter, thanks to the reversal of that drag. 

On Unemployment 

• The government’s go-to measure of the job market for September, the most recent month available, showed that unemployment had inched up to 4.4 percent and job growth had slowed markedly from earlier in the year. 

On Rate Cut 

• In the short term, risks to inflation are tilted to the upside and to employment to the downside — an uncomfortable stance. The downside risks of employment have risen somewhat of late, so the risks are now tilted slightly to the downside. And, accordingly, we decided to lower the target range for the federal funds rate by 1/4 percentage point at this meeting.