Washington — As the Federal Reserve prepares for its final policy meeting of 2025, uncertainty has reached its highest level in years. The December 9–10 FOMC meeting pits two powerful and competing forces against each other: persistent, tariff-driven inflation on one side, and a weakening labor market on the other. The resulting policy debate whether to hold interest rates steady or cut them again has turned into what multiple analysts now call a “coin flip.”
The stakes are significant. After two rate cuts earlier in the year, the federal funds rate currently sits in the 3.75% to 4.0% range. The decision in December may determine the trajectory of U.S. economic stability entering 2026.
Inflation Remains Above Target, Fueling Hawkish Resistance
Inflation is the main obstacle preventing the Federal Reserve from committing to another interest rate cut. While inflation has fallen dramatically from the highs seen earlier in the decade, it remains stubbornly above the Fed’s 2% target.
- U.S. CPI inflation (Sept. 2025): 3.0%
- Core PCE inflation (Fed’s preferred gauge): ~2.75%
While these figures show moderation, they remain elevated enough for hawkish officials to argue that the Fed must hold steady.
Tariff Effects Complicate the Picture
A major complicating factor is the inflationary impact of tariffs. Fed officials have publicly noted that the increased tariff structure implemented over the last 18 months has contributed 0.5% to 0.75% to inflation.
In other words, underlying domestic inflation may be much closer to target but in official statistics, the Fed must still contend with headline numbers that run hotter than desired.
Hawkish Position: “We Must Anchor Expectations”
Fed officials leaning against further cuts have voiced concern that lowering borrowing costs prematurely could reignite inflation at a time when price expectations must remain firmly anchored.
Their argument is straightforward:
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Inflation is still above target
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Tariffs distort underlying price trends
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Cutting rates too soon risks reversing hard-earned progress
With inflation still in the 2.75–3.0% zone, hawkish policymakers have expressed discomfort moving rates lower until they see several more months of cooling.
Labor Market Weakness Strengthens the Case for a Cut
The other side of the debate centers on the U.S. labor market, which has begun flashing warning signals.
- Job growth (September 2025): 119,000 jobs added
- Unemployment rate: 4.4% — the highest since October 2021
Although the rise in unemployment is partly due to increased labor force participation, it still reflects a meaningful softening in labor market conditions.
Job Growth Has Decelerated
Over the past year, monthly job gains have steadily slowed. Economists warn that declining hiring rates often precede broader economic downturns. For doves, the September jobs report is another sign that waiting too long to provide monetary support risks pushing the U.S. economy into recession.
Dovish Position: “Cut Now to Avoid Something Worse”
The pro-cut camp argues that the Fed is no longer operating from a position of strength.
They point to:
- Rising unemployment
- Slowing hiring
- Cooling wage pressures
- Reduced consumer confidence
Doves believe the Fed should preemptively cushion the slowdown rather than respond reactively after a recession begins. Several economists, including analysts at Goldman Sachs, have described the potential December cut as a matter of risk management rather than stimulus.
Probability Forecasts Show No Clear Consensus
The split among Fed officials mirrors the divide among analysts, traders, and economic researchers.
| Source | Probability of December Rate Cut (Mid-Nov. 2025) | Interpretation |
|---|---|---|
| CME FedWatch Tool | ~41% | Traders lean slightly toward a “no change” outcome |
| FactSet Poll (Economists) | 22% | Most economists expect rates to remain unchanged |
| Goldman Sachs | Cut expected | Analysts believe labor weakness will force a cut |
The differing forecasts underscore the unusual level of uncertainty surrounding this meeting. Typically, markets and economists converge as the meeting approaches. This year, the divide is widening instead of narrowing.
Why the December Meeting Is So Difficult
The Federal Reserve’s dual mandate requires:
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Maintaining stable prices
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Maximizing employment
Usually, these goals move in the same direction. In 2025, they do not.
Inflation: Not at target
Employment: Showing signs of deterioration
This dynamic places the central bank in a rare and uncomfortable position. If the Fed holds steady, it risks deepening the labor slowdown. If it cuts, it risks further delaying the return to the 2% inflation target.
Geopolitical and Trade Pressures Add Complexity
The inflationary impact of tariffs remains a significant factor. Additionally:
- Global shipping disruptions
- Commodity price volatility
- Slowing Chinese and European growth
These external variables make it harder for Fed officials to rely on standard forecasting models.
What Analysts Expect Going Into 2026
Regardless of the December outcome, most analysts foresee at least several rate cuts in 2026 assuming inflation continues drifting downward and the labor market weakens further.
If the Fed Cuts in December
- Borrowing costs for households decline
- Markets may begin pricing in multiple 2026 cuts
- Inflation could fall more slowly than expected
If the Fed Holds Steady
- Markets may reposition for an early-2026 cut
- Labor market cooling becomes the central concern
- Inflation progress becomes more credible
Either path carries risk, and both require careful calibration.
Conclusion: A Rare Situation With No Easy Answer
The December 2025 FOMC meeting will be one of the most consequential and most uncertain in recent memory. Inflation remains above target, but the labor market is losing momentum more quickly than many anticipated.
For the first time in years, the Federal Reserve faces a true 50-50 decision.
As policymakers prepare to meet, they must reconcile conflicting data, unpredictable global pressures, and a domestic economic landscape in transition. The final decision will likely come down to the Fed’s assessment of which risk is greater:
- Cutting too soon and undermining inflation progress, or
- Cutting too late and triggering a recession.
Whichever path the Federal Reserve takes in December will shape the direction of the U.S. economy well into 2026 and beyond.
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