The U.S. Federal Reserve has announced another 25 basis point rate cut, lowering the federal funds rate to 3.50%–3.75%. This marks the third rate cut of 2025, following earlier moves in September and October. The decision reflects the Fed’s growing concerns about the labour market, even as inflation remains above its 2% target.
According to recent data, the U.S. unemployment rate has climbed to 4.4%, the highest in more than two years. Job creation has also slowed, with the economy adding around 119,000 jobs, signalling a cooling labour market. The Fed highlighted its dual mandate, controlling inflation and supporting maximum employment and noted that “downside risks to employment” have increased. This suggests the rate cut is aimed at preventing further labour market weakening while still guiding inflation lower.
Inside the Fed, the decision was not unanimous. Out of 12 FOMC members, 9 voted for the 25-bps cut, 1 wanted a 50-bps cut, and 2 wanted no cut at all. This level of division shows how difficult policymaking has become at a time when economic signals are mixed. Inflation remains sticky, but the labour market is clearly softening and both matter for future Fed decisions.
The Fed also signalled a shift in its liquidity approach. It announced that it will soon begin buying short-term Treasury bills (T-bills) to ensure ample reserve balances in the banking system. This is notable because it marks a partial reversal from its earlier quantitative tightening strategy, where it was shrinking its balance sheet. The new move is meant to stabilise money market liquidity, especially ahead of the year-end period when funding stress often rises.
Looking ahead, the Fed said it will follow a “wait and watch” approach. It did not commit to more cuts and emphasised that upcoming economic data will guide future decisions. The next FOMC meeting is scheduled for January 27–28, 2026.
For global markets, the rate cut may boost sentiment. Lower U.S. interest rates typically reduce U.S. bond yields, making emerging markets, including India more attractive. However, analysts expect the impact on India to be limited in the near term. Domestic factors such as liquidity pressure from multiple IPOs and ongoing financial tightening may limit foreign capital inflows.
Overall, the rate cut underscores the Fed’s delicate balancing act. It is trying to support a weakening job market while maintaining control over inflation, all amid internal disagreement and global economic uncertainty. The coming months will reveal whether the Fed can successfully navigate these competing pressures or whether deeper cuts may eventually be needed.