The Federal Reserve cut the fed funds rate yesterday as expected. The stock market partied because this met expectations.
Since 2000, the Fed has conducted four campaigns of raising the real fed funds rate to the historic level of about 2% over the inflation rate. But these campaigns only lasted less than a year. In 2000, 2007 and 2019 the Fed cut the fed funds rate rapidly to a very low rate. They did this to bolster weakness in the economy because these were the start of recessions. Inflation was low during that time period.
There is no recession now. Inflation is higher than the Fedâs target so there is no reason to cut the fed funds rate. Yesterdayâs rate cut wasnât justified.
The new fed funds rate cut brings the benchmark Fed funds rate into a range of 3.5%-3.75%. The Cleveland Fed predicts the 4Q2025 CPI will be 3.37% (quarterly annualized). This means the real yield of the fed funds rate is close to zero. Any more cuts and it would be negative.
Despite the Fedâs mandate to maintain low inflation, President Trump is putting heavy pressure on the Fed to cut the fed funds rate drastically as it has done before. Those previous cuts led to bubbles because the real rates were negative.
Iâm not the only one who thinks that the Fed should not be cutting the fed funds rate with inflation still too high.
Fedâs Fractured Vote Signals Trouble Ahead for Future Rate Cuts
Trump wants lower rates and a new Fed chair. Wednesdayâs divisions suggest one wonât guarantee the other.
By Nick Timiraos, The Wall Street Journal, Dec. 10, 2025
Jerome Powell pushed through a rate cut Wednesday over the broadest reservations of his nearly eight-year tenure, and in doing so, implicitly delivered a pointed message to President Trump and his own successor: Cutting rates is harder than it looks.
The decision drew three dissentsâtwo from officials who opposed any cut and one from a Trump ally who wanted a larger reduction.
The formal vote understated the resistance. Four other officials registered a quieter objection in the Fedâs quarterly projections: They wrote down a higher interest rate for 2025 than the one the committee approvedâa signal they wouldnât have cut. Together with the dissenters, that is roughly a third of the policymakers who attend Fed meetings.
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This is a long article that describes political games to try to influence the Federal Reserve. This certainly undermines my confidence in the objectivity of the Fed.
Itâs time for a reminder that the fed funds rate is an overnight interest rate. The bond market, not the Fed, controls the longer term yields which are far more important to the economy.
The bond market isnât buying the Fedâs rate cuts
Posted on December 11, 2025 by Tipswatch
By David Enna, Tipswatch.com
As the Federal Reserve continues on a path toward lower short-term interest rates, the bond market isnât tagging along. Instead, yields on medium- and longer-term Treasurys have been increasing, not falling.
The Fed began its latest phase of rate-cutting on Sept. 17, 2025, and has now cut the federal funds rate by 75 basis points over the last four months. That has brought short-term rates down, but has had no effect in lowering longer-term rates.
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The only way the Fed can suppress long-term yields is by Quantitative Easing â massively buying Treasury debt using fiat dollars conjured out of thin air. Theyâve done it before but only during financial crises and serious recession. QE without a recession would lead to massive inflation since the federal budget deficit is a fiscal deficit â the money goes into consumer pockets.
Iâm very uneasy about several aspects of this situation.
I donât trust the Fed to resist political pressure from President Trump and his appointees to maintain a neutral fed funds rate.
I donât trust the Fed to resist political pressure to do QE even if the situation doesnât warrant it.
I donât trust the BLS to report inflation honestly since Trump fired the director after an employment report he didnât like.
Wendy