Fed orchestrates hawkish insurance cut
Policymakers lower rates despite boosting GDP forecasts and reducing inflation estimates.
Published December 12 2025
Bottom line
The Federal Reserve cut interest rates at its third consecutive policy-setting meeting on Wednesday by a quarter point, to a target range of 3.50-3.75%, which is a three-year low. The meeting featured a rare triple dissent on either side of the announced decision. Once again, Fed governor Stephen Miran dissented in favor of a more aggressive half-point cut, while Chicago Fed president Austan Goolsbee and Kansas City Fed president Jeffrey Schmid favored no change in rates. The deterioration in the labor market appeared to outweigh concerns about moderating inflation.
Taking a step back and looking at the Fed’s monetary policy actions more broadly, the central bank has now cut interest rates by 175 basis points over the past 15 months, which includes 100 basis points in September, November and December of 2024.
Changes to the SEP Significantly, in its new quarterly Summary of Economic Projections (SEP), the central bank raised its expectations for GDP growth for this year and in each of the next three years, while reducing its estimates for core PCE inflation this year and next. It left its forecast for unemployment unchanged, as well as its expectations for one additional interest rate cut in each of the next two years.
GDP growth higher In its new December SEP update, the Fed raised its estimate for GDP growth this year from 1.6% to 1.7%, compared with actual GDP growth of 2.8% in 2024. The Fed also raised its 2026 GDP estimate from 1.8% to 2.3%; its 2027 forecast from 1.9% to 2.0%; and its 2028 projection from 1.8% to 1.9%.
In contrast, Federated Hermes is forecasting stronger GDP growth of 2.2% this year and 2.9% in 2026. We have a constructive view on consumer spending, which accounts for 70% of GDP. Back-to-School spending from June through September rose by a strong 4.5% year-over-year (y/y), compared with 2.3% growth last year, and Christmas spending has gotten off to a solid start. We expect an acceleration in corporate expenditures this year and next due to the full-expensing provision in President Trump’s One Big Beautiful Bill Act. With lower interest rates, we expect housing to pick up next year. Finally, President Trump’s trade and tariff policies have become a smaller drag on economic growth and have resulted in higher revenue generation over the past two quarters.
Inflation growth moderating In its new December SEP, the Fed reduced its estimate for core PCE inflation, its preferred measure of inflation, to rise by 3.0% y/y in 2025, down from its September forecast of 3.1%. In fact, core PCE slowed to 2.8% y/y in September, down from 2.9% in July and August. Federated Hermes is forecasting 2.8% in 2025. In 2026, the central bank lowered its core PCE target from 2.6% in its September SEP to 2.5% in December, in line with Federated Hermes’ estimate.
Labor market struggling The unemployment rate (U-3) has risen from a 53-year low of 3.4% in April 2023 to 4.4% in September 2025. The Fed did not change its forecast yesterday, projecting that unemployment will continue to rise to 4.5% by the end of this year, and then gradually decline to 4.4% in 2026. For 2027, it lowered its U-3 estimate from 4.3% in its September SEP to 4.2% in December.
Fed Chair Jerome Powell did surprise investors during his press conference when he said that the Fed is shaving an estimated 60,000 jobs off each initial payroll print, to allow for eventual downward revisions. That’s significant. Over the past five months through September, non-farm payroll gains have deteriorated to an average of only 39,000 jobs per month — including jobs losses in June and August — the weakest pace of job creation since the depths of the Covid pandemic. That compares with average monthly payroll gains of 123,000 over the first four months of 2025 and 168,000 during 2024.
Initial weekly jobless claims rose to a three-month high of 236,000 for the week ended December 6. ADP private payrolls in November posted a much weaker-than-expected loss of 32,000 jobs (consensus gain of 10,000 expected), down from a gain of 47,000 jobs in October. ADP has lost jobs in three of the past four months, mostly at small- and medium-sized companies. Challenger announced sizable job cuts of more than 71,000 in November and 153,000 in October 2025. This marks the worst year for layoffs at more than 1.1 million to date since the Global Financial Crisis. Seasonal hiring plans are the lowest since Challenger started tracking them in 2012.
Fed on hold? In its December SEP, the Fed did not change its forecast for one more quarter point cut during 2026 and another in 2027. We think the Fed will likely pause at its next policy-setting meeting on January 28, digesting the three recent cuts. But by its March meeting, the federal government will have finally caught up with its data backlog from the record six-week shutdown. With potentially weak nonfarm payroll reports in hand from January and February — and with inflationary pressures continuing to moderate — a March rate cut may well be in the cards. Collectively, we are still expecting three more quarter-point cuts by the end of 2026, which would take the terminal value of the fed funds rate down to 3.0%. Embedded in our forecast is our expectation of a transition to more dovish leadership at the Fed, when Chair Powell’s term expires in May 2026.
Right out of central casting While Treasury Secretary Scott Bessent has narrowed the search for the next Fed Chair to five finalists, we believe that President Trump will nominate Kevin Hassett, whom we view as a solid choice. His Ph.D. in economics is from the Wharton School of the University of Pennsylvania, which also happens to be President Trump’s alma mater. Hassett was a professor of economics at Columbia University, he worked as an economist at the Fed and he served in the Treasury Department during the George H. W. Bush and Clinton administrations. More recently, Hassett was the chair of the Council of Economic Advisors (CEA) during Trump 1.0, and he is currently the director of the National Economic Council (NEC). He is a highly regarded supply-side voice within the economics community, which would provide much-needed balance to the current configuration of the FOMC, which is heavily populated by Keynesian-trained economists. His only potential shortfall is a lack of experience with the financial markets. We expect President Trump to announce his choice before the next Fed meeting on January 28, to allow sufficient time for the Senate confirmation process, which typically takes several months.
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