Overview
In a single year the Fed has gone from peak post‑Covid rates to a clear easing cycle. December’s third 2025 rate cut pushes the federal funds range down to 3.5–3.75% and flips the switch on a new operating regime built around full‑allotment repos and steady Treasury bill buying.
This isn’t a sleepy mid‑cycle tweak. The job market is softening, inflation is still above target, and President Trump is openly demanding deeper cuts while trying to remake the Fed’s board. The fight now is over how far and how fast rates fall—and whether the central bank can stay independent while doing it.
Key Indicators
People Involved
Organizations Involved
The Fed sets U.S. interest rates and runs the plumbing of dollar funding markets.
The FOMC votes on interest‑rate decisions and directs the New York Fed’s market operations.
The New York Fed’s trading desk executes the FOMC’s instructions in money and Treasury markets.
The administration is waging a public and legal campaign to bend independent regulators, including the Fed, toward its agenda.
Timeline
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New York Fed removes repo cap, makes facility full‑allotment
OperationalEffective December 11, the New York Fed’s Desk drops the aggregate limit on standing overnight repos, moving to full allotment at the policy rate—turning the facility into an unlimited liquidity backstop.
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Dot plot reveals deep division over 2026 path
ForecastNew Fed projections show a median call for just one 2026 cut, but a wide range from no further easing to possible hikes, underlining how unsettled the outlook is as Powell’s term nears its end.
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Third 2025 cut and new operating regime unveiled
Policy DecisionThe Fed cuts rates to 3.50–3.75% in a split vote and issues an Implementation Note that lowers reserve interest to 3.65%, restarts ongoing T‑bill purchases, and solidifies its ample‑reserves framework.
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Quantitative tightening stops; reinvestment into T‑bills begins
OperationalWith QT halted, the Fed starts rolling all maturing Treasuries and agency principal back into Treasuries, tilting increasingly toward Treasury bills to keep reserves “ample.”
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Second cut and QT’s end: Fed moves to 3.75–4.00%
Policy DecisionThe FOMC trims another 25 basis points and announces its balance‑sheet runoff will end December 1, with future Treasury and agency proceeds fully reinvested into government securities.
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Supreme Court lets Cook stay through at least year‑end
LegalThe Supreme Court allows Cook to keep her Fed seat pending a full hearing in January 2026, ensuring she can vote on the October and December cuts.
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Judge blocks Cook firing; Trump appeals up the chain
LegalA federal judge grants Cook a preliminary injunction keeping her on the Board. The Justice Department rushes appeals, and the case edges toward the Supreme Court.
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Lisa Cook sues Trump over attempted firing
LegalFed Governor Lisa Cook files suit arguing Trump’s move to fire her over disputed mortgage allegations violates the Fed’s “for cause” protections and threatens its independence.
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First 2025 cut: rates down to 4.00–4.25% as jobs weaken
Policy DecisionCiting slower job gains and still‑elevated inflation, the Fed cuts 25 basis points. New Governor Stephen Miran dissents in favor of a half‑point move, while projections pencil in two more cuts this year.
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Fed holds again; internal hawks want to start cutting
Policy DecisionThe FOMC keeps rates at 4.25–4.50% but Governors Bowman and Waller dissent in favor of a quarter‑point cut, foreshadowing the pivot to easing.
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Trump demands 100‑bp cut despite upbeat jobs report
Political PressureTrump publicly urges Powell to slash rates by a full percentage point, reinforcing a months‑long pressure campaign that many economists say threatens Fed independence.
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Fed freezes at 4.25–4.50% as risks look balanced
Policy DecisionThe FOMC keeps rates unchanged and calls inflation “somewhat elevated” but sees risks to jobs and prices as roughly in balance, setting up a long holding pattern.
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Fed ends hiking era with first trim to 4.25–4.50%
Policy DecisionAfter holding the line at post‑Covid highs, the FOMC delivers a 25‑basis‑point cut and signals that future easing will proceed cautiously as inflation, while easing, remains above target.
Scenarios
Fed Pauses at 3.5–3.75%, Engineers a Bumpy but Real Soft Landing
Discussed by: Mainstream Fed watchers and bank research notes (J.P. Morgan, TD, Morgan Stanley), plus December Fed projections.
In this base‑case path, growth cools but doesn’t crack, unemployment drifts only modestly higher, and inflation slowly falls toward the mid‑2s. The Fed holds policy roughly where it is now through most of 2026, with at most one more token cut. Powell or his successor keeps stressing “data dependence,” and the new repo and T‑bill regime quietly maintains money‑market stability in the background.
Trump Installs a Dovish Chair, Fed Slashes Toward 2% and Inflation Rekindles
Discussed by: Political analysts and some economists worried about expanded presidential firing power over independent agencies.
If courts bless a broader presidential right to fire independent officials and Trump replaces Powell in 2026 with a loyal dove, the center of gravity on the FOMC could swing sharply toward faster cuts. Rates could slide toward 2% even if inflation is still above target, pleasing markets in the short run but risking a replay of the 1970s: inflation expectations creep up, long‑term yields rise, and the Fed eventually has to reverse course abruptly.
Hard Landing: Job Losses Spike, Forcing Emergency Cuts and New QE
Discussed by: More bearish macro strategists and recession‑risk analysts.
A sharper than expected downturn—from a tariff shock, credit accident, or global slowdown—could send unemployment well above 5.5% while inflation is still only grudgingly easing. Under its dual mandate and new risk‑management rhetoric, the Fed would likely slash rates rapidly back toward the effective lower bound and consider revived large‑scale asset purchases. That would stabilize markets but reignite debates over financial bubbles, inequality, and whether the Fed enabled fiscal and trade policy mistakes.
Historical Context
2019 Fed ‘Mid‑Cycle Adjustment’ and Repo Market Turmoil
2019What Happened
In 2019 the Fed cut rates three times by 25 basis points while calling the moves a “mid‑cycle adjustment,” not a full easing campaign. Soon after, it faced a spike in repo rates and quietly began buying T‑bills to rebuild reserves, all under intense criticism from President Trump for not cutting faster.
Outcome
Short term: The economy avoided recession, but markets were confused by mixed messaging on whether this was easing or just insurance.
Long term: The episode previewed today’s ample‑reserves regime and showed how quickly money‑market plumbing can force balance‑sheet changes.
Why It's Relevant
It offers a close precedent for today’s combo of small cuts, T‑bill purchases, repo tweaks, and loud White House pressure.
1995 Soft‑Landing Easing Under Alan Greenspan
1994–1996What Happened
After a sharp 1994 hiking cycle, the Fed trimmed rates three times in 1995 as inflation stayed contained but growth slowed. The goal was to prevent a policy‑induced recession without re‑igniting inflation, using small, data‑driven moves rather than a full‑blown stimulus.
Outcome
Short term: The economy re‑accelerated, and the U.S. enjoyed several more years of expansion without a surge in inflation.
Long term: 1995 became the textbook example of a ‘soft landing’ engineered through modest, timely easing.
Why It's Relevant
This is the optimistic template Powell’s Fed is trying to follow: modest cuts, steady hand, no panic.
1970s Pressure on Fed Chair Arthur Burns Under President Nixon
1969–1974What Happened
Facing reelection, Nixon leaned on Fed Chair Arthur Burns to keep money easy, privately berating him and publicly hinting at consequences. The Fed held rates too low for too long as inflation pressures built, contributing to the stagflation that defined the decade.
Outcome
Short term: Unemployment dipped and growth held up briefly, helping Nixon politically.
Long term: The episode badly damaged the Fed’s credibility and forced much harsher tightening later under Paul Volcker.
Why It's Relevant
It’s the cautionary tale behind today’s anxiety that Trump’s campaign against the Fed could end with higher inflation and a harsher cleanup job later.