Fed Cuts Interest Rates: Situation Surrounding U.S. Economy Complicates Central Bank’s Next Moves

Editorial

15:29 JST, December 12, 2025

The U.S. economy finds itself caught in a dilemma, with concerns over deteriorating employment and a risk of renewed inflation.

Under such circumstances, the U.S. Federal Reserve Board has decided to cut its policy rate by 0.25 percentage points to a range of 3.50%-3.75% per year. This marks the third consecutive rate cut since its September meeting. The Fed signaled it expects only one more rate cut next year.

While the U.S. economy is robust for now, there is significant uncertainty about the future, due in part to U.S. President Donald Trump’s tariff policy. There are also downside risks to employment. The Fed likely decided to cut its rates out of concern for the economy.

However, this is not a situation in which vigilance against inflation can be eased.

It has been pointed out that high tariffs will be passed on in transaction prices as time passes. This is because hasty interest rate cuts could accelerate inflation, negatively impacting the lives of low-income earners.

The outcome of the latest Fed meeting seemed to show that it is becoming increasingly difficult to manage fiscal policy. Among the 12 Fed officials who can vote, three cast dissenting votes: Two argued for keeping interest rates unchanged and one argued for a 0.5 percentage point cut. This is the first time in six years that three officials have voted against a decision.

At a press conference, Fed Chair Jerome Powell indicated that there is time to decide on policy changes at future meetings, indicating caution about additional rate cuts. Hopefully, the Fed will continue to engage in careful discussions to prevent further internal conflict.

Another concern is that Trump continues to pressure the Fed to cut rates. He criticized the size of the latest cuts, saying they could have been “at least doubled.”

Trump has indicated that early next year he plans to announce a successor to Powell, whose term expires in May next year.

The Trump administration’s approval ratings remain low, largely due to dissatisfaction with high prices. To prevent inflation from reigniting, Trump should respect the Fed’s decision.

Meanwhile, the Bank of Japan will decide whether to raise interest rates at its monetary policy meeting next week. The market is increasingly expecting a rate hike to around 0.75%.

Basically, if the Fed continues to cut rates while the BOJ raises them, the interest rate gap between Japan and the United States will narrow, which should contribute to a stronger yen. However, while the yen temporarily strengthened to around ¥140 to the dollar this spring, it is currently hovering at around ¥155.

If the excessively weak yen fuels higher prices, it will strain household budgets. It is crucial for the Bank of Japan to determine the timing of rate hikes while paying attention to the exchange rate. It is necessary to explain the path of future policy management in an easy-to-understand manner and lead to economic growth.

(From The Yomiuri Shimbun, Dec. 12, 2025)