Minutes of the Federal Open Market Committee (2025-12-10)

Home Monetary Policy Federal Open Market Committee Federal Open Market Committee PDF FOMC Minutes Minutes of the Federal Open Market Committee December 9–10, 2025 A joint meeting of the Federal Open Market Committee and the Board of Governors of the Federal Reserve System was held in the offices of the Board of Governors on Tuesday, December 9, 2025, at 9:00 a.m. and continued on Wednesday, December 10, 2025, at 9:00 a.m.1 Developments in Financial Markets and Open Market Operations The manager turned first to an overview of broad market developments during the intermeeting period. Market participants did not materially change their macroeconomic outlooks and continued to interpret data made available over the intermeeting period as consistent with a resilient economy. Investors' expectations for the path of the policy rate, whether market based or survey based, were little changed, on net, over the period. Market participants and respondents to the Open Market Desk's Survey of Market Expectations (Desk survey) generally expected a 25 basis point reduction in the target range for the federal funds rate at the December FOMC meeting, and the modal outlook from the survey as well as from options pricing implied two additional rate cuts next year. The manager turned next to developments in Treasury markets and market-based measures of inflation compensation. Treasury yields rose a little over the intermeeting period, on net, but remained within recent ranges. Inflation compensation moved lower over the period, particularly for shorter tenors. The manager attributed the decline in inflation compensation at shorter tenors to lower energy prices as well as a reassessment by some market participants of the likely effect of tariffs on near-term inflation. In contrast to market-based measures of inflation compensation, survey- and model- based measures of inflation expectations were little changed over the intermeeting period. Broad equity price indexes were volatile but changed little, on net, over the intermeeting period. Equity prices showed sensitivity to economic data and policymaker communications. Developments regarding artificial intelligence (AI) also contributed to the volatility of the stock prices of the largest technology companies. The manager noted that capital expenditures on equipment and infrastructure related to AI by a set of large technology companies accelerated this year and that these firms were increasingly relying on debt to finance such expenditures. Regarding international developments, the trade-weighted dollar index was little changed over the intermeeting period. Outside forecasters continued to expect that the dollar would depreciate modestly next year. Many of these forecasters expected a larger reduction in policy rates in the U.S. than in other advanced-economy jurisdictions, though their confidence in this view appeared to diminish somewhat in light of the resilience of the U.S. economy. The manager noted that money market conditions continued to tighten over the intermeeting period and that the staff assessed that conditions were consistent with the level of reserves having declined to the ample region. Rates on Treasury repurchase agreements (repo) remained relatively elevated and volatile over the intermeeting period. Investors attributed firmness in repo rates to a decline in available liquidity and continued large Treasury debt issuance. Higher repo rates, along with a lower level of reserves, continued to contribute to upward pressure on the spread between the effective federal funds rate (EFFR) and the interest rate on reserve balances. The manager noted that the correlation between this spread and the level of reserve balances had risen notably over the past couple of months and that the EFFR had moved up faster than it had during the previous episode of balance sheet runoff. Consistent with elevated repo rates, usage of overnight reverse repo operations remained low, while both the frequency and volume of standing repo operations increased over the intermeeting period. Some other key indicators of reserve ampleness, such as the share of payments by banks occurring later in the day and the share of domestic banks borrowing in the federal funds market, also pointed to ample reserve conditions. The manager next discussed the expected trajectory of key components of the Federal Reserve's balance sheet. Over the next several months, seasonal fluctuations in nonreserve liabilities were projected to lead to significant declines in reserves at the end of December, in late January, and especially in mid-to-late April if securities holdings in the System Open Market Account (SOMA) were to remain unchanged. The manager noted that the projected fall in reserves in April caused by tax inflows to the Treasury General Account (TGA)—which is a Federal Reserve liability—was particularly large and thus judged that reserves were likely to fall below the ample range if the size of the SOMA portfolio were to remain unchanged. In light of this projected decline in reserves as well as recent developments in money markets, the manager recommended that the Committee consider starting reserve management purchases (RMPs) this month to maintain an ample level of reserves on an ongoing basis. Because of the substantial projected decline in reserves in mid-to-late April, the manager judged that it would be prudent to start RMPs soon, maintain a somewhat elevated pace of net purchases until then, and then decrease the monthly pace substantially thereafter. Respondents to the Desk survey expected RMPs to begin soon. Over one-third of respondents expected RMPs to be announced at this meeting and begin by next month, and most respondents anticipated them to begin before the end of the first quarter of 2026. While the estimated size of expected purchases varied considerably across respondents, on average, respondents anticipated net purchases of about $220 billion over the first 12 months of purchases. The manager then turned to a discussion of standing repo operations and the essential role they play in supporting the implementation of monetary policy. While usage of these operations had increased recently, there had been days when a large volume of repo trades occurred well above the operations' minimum bid rate, suggesting reluctance by some potential participants to engage in standing repo operations. Market outreach suggested that this reluctance reflected misperceptions about the intended purpose of standing repo operations and that the effectiveness of these operations could be enhanced by Federal Reserve communications that explicitly clarified that the purpose of the operations is to support monetary policy implementation. Market participants also suggested that reluctance to use standing repo operations reflected in part specific operational features, and they offered a number of suggestions to enhance the effectiveness of the operations, such as allowing them to be centrally cleared and eliminating the aggregate limit of $500 billion per day. Given the importance of standing repo operations for monetary policy implementation, the manager proposed to clarify their intended role in official communications, convey the expectation that they would be used when economically sensible, and eliminate their aggregate limit. By unanimous vote, the Committee ratified the Desk's domestic transactions over the intermeeting period. There were no intervention operations in foreign currencies for the System's account during the intermeeting period. Special Topic: Balance Sheet Issues Participants discussed developments in money markets and whether starting RMPs was warranted to maintain reserves at levels consistent with the Committee's ample-reserves framework laid out in its 2019 Statement Regarding Monetary Policy Implementation and Balance Sheet Normalization. With the continued increases in the spreads between money market interest rates and administered rates, as well as some other indicators of tightening money market conditions, participants judged that reserve balances had declined to ample levels. Accordingly, participants assessed that it was appropriate to begin RMPs and initiate purchases of shorter-term Treasury securities to maintain an ample supply of reserves over time. The discussion was preceded by staff presentations. The staff emphasized that a range of levels of reserve balances was consistent with ample and presented indicators showing that money market conditions pointed to reserves being within the ample range. In particular, the spreads of the EFFR and of other money market rates to the interest rate on reserve balances had increased relatively quickly since mid-September. Additionally, several other indicators of liquidity in short-term funding markets, including the volatility of repo rates and their sensitivity to Treasury coupon issuance, pointed to reserves being within the ample range. The staff emphasized the role that standing repo operations had played in ensuring that the federal funds rate remained within its target range, even on days of elevated demand for nonreserve liabilities. The staff also noted the implications of reserves varying within the ample range for volatility and market functioning in money markets, the size of the Federal Reserve's balance sheet, and the use of standing repo operations. The staff noted that maintaining ample reserves over time would require the SOMA security portfolio to expand to accommodate trend growth in the demand for reserves and nonreserve liabilities. In addition, under the ample-reserves framework, the size of the SOMA portfolio would need to be sufficient to accommodate significant seasonal variation in the demand for nonreserve liabilities, such as that driven by fluctuations in TGA balances. The staff presented options for how the Desk could structure RMPs to maintain an ample supply of reserves. They noted the benefits of granting the Desk flexibility to adjust the sizes of RMPs in anticipation of or in response to swings in reserve demand and the demand for nonreserve liabilities. The staff also noted that, consistent with the goal of returning to a primarily Treasury portfolio expressed in the Committee's 2022 Principles for Reducing the Size of the Federal Reserve's Balance Sheet and a preference to shift the SOMA portfolio composition toward that of Treasury securities outstanding, RMPs could be conducted primarily in Treasury bills. Participants agreed that recent money market conditions pointed to reserves being within the ample range and that beginning RMPs would be prudent to maintain a supply of ample reserves. A couple of participants remarked that the recent increase in the spread between the EFFR and the interest rate on reserve balances had been faster than during the Federal Reserve's 2017–19 runoff experience, and a couple of participants observed that triparty repo rates had been averaging somewhat above the interest rate on reserve balances. Participants expressed their preferences for purchases to be in Treasury bills so that the SOMA portfolio composition would begin to shift toward that of Treasury securities outstanding, though no decision was made on the composition of the portfolio in the long run. Policymakers generally emphasized the importance of communicating that RMPs would be made solely to ensure interest rate control and smooth market functioning and had no implications for the stance of monetary policy. Participants generally agreed that providing the Desk flexibility to adjust the size and timing of RMPs was important because of the significant variation in the demand for Federal Reserve liabilities and the uncertainty surrounding projections of this demand. When discussing how to structure RMPs in light of this variation, several participants emphasized that they preferred to front-load purchases so that the total level of reserves supplied to the market would be enough to manage large anticipated seasonal swings in nonreserve liabilities without having to rely on standing repo operations. Some other participants, however, preferred to limit balance sheet size by conducting RMPs closer to periods of elevated demand for nonreserve liabilities and relying more on standing repo operations to damp upward pressure on rates. Several participants noted that aligning variation in SOMA Treasury bill holdings with variation in nonreserve liabilities would insulate reserve supply from TGA changes, citing research by the Federal Reserve staff. Participants also discussed the role of standing repo operations and commented on their importance for interest rate control in the ample-reserves regime. Some participants emphasized their preference that standing repo operations play a more active role in rate control, with material usage during periods of elevated pressures in money markets. A couple of participants added that effective standing repo operations may allow for a smaller balance sheet on average. Several participants preferred to rely more on RMPs to maintain an ample level of reserves. Various participants noted that a more precise definition of "ample" would help clarify the Committee's intentions in implementing an ample-reserves framework. A few participants noted the difficulties of aiming to target an appropriate level of reserves because of the potential shifts in reserve demand. Some participants offered a view that an ample-reserves definition should focus on the level of money market rates in relation to the interest rate on reserve balances, with a few of those participants highlighting that such an approach would avoid some of the challenges of targeting a particular level of reserves given potential shifts in reserve demand. A couple of participants expressed the view that a definition of "ample reserves" that resulted in a larger supply of reserves than necessary to implement the Committee's framework could lead to excessive risk-taking by leveraged investors. Staff Review of the Economic Situation The information available at the time of the meeting indicated that real gross domestic product (GDP) had expanded moderately over this year. The unemployment rate had edged up and the pace of payroll employment increases had slowed through September; more recent labor market indicators were consistent with these developments. Consumer price inflation had moved up since earlier in the year and remained somewhat elevated. The unemployment rate ticked up to 4.4 percent in September, continuing the gradual upward trend seen since the middle of the year. The average monthly pace of total payroll gains continued to be slower in the third quarter than early in the year. Other available labor market indicators—such as initial claims for unemployment insurance benefits, rates of job openings and layoffs, and survey measures of households' and businesses' perceptions of the balance between labor demand and supply—were consistent with a gradual cooling in labor market conditions since September. The employment cost index for total private-sector labor compensation rose 3.5 percent over the 12 months ending in September, and average hourly earnings for all employees increased 3.8 percent over the same 12-month period. Both measures of hourly labor compensation growth were close to their year-earlier rates. Total consumer price inflation—as measured by the 12‑month change in the price index for personal consumption expenditures (PCE)—was 2.8 percent in September. Core PCE price inflation, which excludes changes in consumer energy prices and many consumer food prices, was also 2.8 percent in September. Both total and core PCE price inflation were somewhat higher than earlier in the year. Core services price inflation had moved down, but core goods price inflation had picked up, which the staff largely attributed to the effects of higher tariffs. The available indicators suggested that real GDP growth was solid in the third quarter, although the average rate of increase over the first three quarters of the year was moderate and slower than its 2024 pace. Real private domestic final purchases—which comprises PCE and private fixed investment spending and which often provides a better signal of underlying economic momentum than does GDP—appeared to have risen faster than GDP over the first three quarters of the year but also had slowed relative to last year. Real goods imports declined in August, reversing the increase in the preceding month, while real goods exports edged down further. The federal government shutdown was expected to reduce real GDP growth around 1 percentage point in the fourth quarter, with a corresponding boost to output growth in the first quarter of 2026. Foreign economic activity continued to expand at a below-trend pace in the third quarter, with real GDP having contracted in Mexico and Japan and having grown at only a lackluster pace in Europe. By contrast, economic activity in emerging Asia remained robust amid continued strong external demand for high-tech products and Chinese firms having boosted exports to markets other than the U.S. Headline inflation continued to run near central bank targets in many foreign economies, aided by declines in global energy prices so far this year. Core inflation, however, remained persistently elevated in some economies. A few foreign central banks reduced their policy rates, including the Bank of Canada and the Bank of Mexico, with most others leaving them unchanged. Staff Review of the Financial Situation Over the intermeeting period, both the market-implied expected path of the federal funds rate and nominal Treasury yields edged up on net. Changes in nominal yields reflected increases in real yields, while inflation compensation declined a bit, especially at shorter horizons. Broad equity prices were little changed. While the one-month option-implied volatility on the S&P 500 index at one point reached its highest level since early April, it ended the period roughly unchanged. Investment- and speculative-grade corporate bond spreads increased somewhat but remained at low levels. In foreign financial markets, longer-term yields increased notably over the intermeeting period because of various country-specific factors, including stronger-than-expected employment gains in Canada and rising odds of further monetary policy tightening and fiscal expansion in Japan. In addition, in the euro area, stronger-than-expected data on economic activity and European Central Bank communications regarded as signaling less accommodative policy contributed to rising yields. Foreign equity indexes and the broad dollar index were little changed, on net, over the intermeeting period. Conditions in U.S. short-term funding markets remained orderly but were generally tighter over the intermeeting period. In secured markets, liquidity conditions were tighter, on average, amid robust Treasury issuance, declining reserve balances in recent months, and month-end pressures. Over the intermeeting period, the average level of reserve balances was around $2.9 trillion, about $500 billion lower relative to the level of reserve balances at the start of the Federal Reserve's balance sheet reductions in June 2022. In domestic credit markets, conditions for businesses, households, and municipalities were little changed on balance. Financing conditions remained somewhat restrictive for households and small businesses. Meanwhile, large and midsize businesses continued to access credit markets at a solid pace. Credit performance was largely unchanged, with delinquency rates for small businesses, commercial real estate (CRE), and consumer loans remaining elevated. Yields on corporate bonds increased somewhat. Rates on 30-year fixed-rate conforming residential mortgages, as well as yields on non-agency commercial mortgage-backed securities (CMBS), rose moderately. Credit remained generally available to most businesses, households, and municipalities. Bank loans expanded at a solid pace, and issuance in public and private credit markets was strong, as relatively high interest rates did not appear to significantly restrain borrowing in these markets. By contrast, indicators of credit growth for households and small businesses remained sluggish amid high borrowing costs. Credit performance was little changed in most markets, and credit quality for corporate bonds and leveraged loans had not shown signs of deterioration following two high-profile bankruptcy filings in the fall. There were no nonfinancial corporate bond defaults in September or October, bringing the 12-month trailing default rate below the 35th percentile of its post–Global Financial Crisis distribution. The 12-month trailing default rate for leveraged loans declined a bit in October but remained at an elevated level. Delinquency rates on CRE loans at banks were largely unchanged in the third quarter and remained above pre-pandemic levels, while CMBS delinquency rates had moved sideways since the beginning of the year. Measures of credit performance for household debt were little changed recently. Staff Economic Outlook Relative to the forecast prepared for the October meeting, real GDP growth was projected to be modestly faster, on balance, through 2028, primarily reflecting greater projected support from financial market conditions and somewhat stronger expected potential output growth. After 2025, GDP growth was expected to remain above potential through 2028 as the drag from higher tariffs waned and fiscal policy and financial market conditions continued to support spending. As a result, the unemployment rate was expected to decline gradually after this year and reach a level a little below the staff's estimate of the natural rate of unemployment by 2027. The staff's inflation forecast for 2025 and 2026 was a little lower, on balance, than the one prepared for the October meeting but similar for 2027 and 2028. Tariff increases were expected to continue to put upward pressure on inflation this year and next. Thereafter, inflation was projected to return to its previous disinflationary trend and to reach 2 percent in 2028. The staff still viewed the uncertainty around the forecast as elevated, given cooling labor market conditions, still-elevated inflation, and the uncertainty about government policy changes and their effects on the economy. Risks around the forecasts for employment and real GDP growth continued to be seen as skewed to the downside, as softening labor market conditions and elevated economic uncertainty raised the risk of a sharper-than-expected weakening in the economy. Risks around the inflation forecast continued to be seen as skewed to the upside, with the upward pressure on inflation this year and next—after more than four years of inflation being above 2 percent—raising the possibility that inflation would prove to be more persistent than the staff expected. Participants' Views on Current Conditions and the Economic Outlook In conjunction with this FOMC meeting, participants submitted their projections of the most likely outcomes for real GDP growth, the unemployment rate, and inflation for each year from 2025 through 2028 and over the longer run. The projections were based on participants' individual assessments of appropriate monetary policy, including their projections of the federal funds rate. Participants also provided their individual assessments of the level of uncertainty and the balance of risks associated with their projections. The Summary of Economic Projections was released to the public after the meeting. Participants observed that overall inflation had moved up through September since earlier in the year and remained somewhat above the Committee's 2 percent longer-run goal, but more recent inflation data produced by the government were unavailable. Most participants remarked that core inflation had been pushed up by higher tariffs that boosted goods prices, even as some participants noted that housing services inflation had moved down closer to levels seen during previous periods when inflation was near 2 percent. A couple of participants commented that inflation in some nonmarket services categories had been affected by special factors, and thus were unlikely to provide a clear signal about broader inflationary pressures. A majority of participants remarked that overall inflation had been above target for some time and had not moved closer to the 2 percent objective over the past year. Regarding the outlook for inflation, participants generally expected inflation to remain somewhat elevated in the near term before moving gradually to 2 percent. Many participants emphasized that they expected that the effects of tariffs on core goods inflation would wane, although some expressed uncertainty about when these effects would diminish or the extent to which tariffs would ultimately be passed through to final goods prices. Some participants stated that their business contacts had reported persistent input cost pressures unrelated to tariffs, although several of these participants noted that weaker demand limited the ability of some firms to raise prices or that business productivity gains might enable some firms to manage these cost pressures. A majority of participants expected continued disinflation in housing services, and a few participants expected continued disinflation in core nonhousing services. Participants generally judged that the risks to inflation remained tilted to the upside, although several participants commented that they considered these upside risks to have decreased. Some participants highlighted the risk that elevated inflation might prove more persistent than expected. Participants noted that market- and survey-based measures of longer-term inflation expectations remained stable. A few participants remarked that measures of near-term inflation expectations had been elevated earlier in 2025 but had declined from those peaks. Participants emphasized the importance of maintaining well-anchored longer-run inflation expectations to help return inflation to the Committee's 2 percent objective in a timely manner, and some participants noted concerns that a more prolonged period of above-target inflation could risk an increase in longer-run expectations. With regard to the labor market, participants observed that labor market conditions had continued to soften and that the unemployment rate had edged up in September. Participants reported relying on private-sector and limited government data, as well as information provided by businesses and community contacts, to assess more recent labor market conditions. Most participants remarked that some of the most recent indicators of labor market conditions, including survey-based measures of job availability or reports of planned layoffs, pointed to continued softening. Some participants noted, however, that other indicators, such as weekly initial unemployment insurance claims and measures of job postings, suggested more stability. Several participants commented that lower-income households were especially concerned about their employment prospects. Participants observed that hiring had remained subdued, and some participants pointed to survey-based measures or reports from business contacts that suggested that current hiring plans remained muted. Participants generally viewed the low dynamism in the labor market as reflecting both lower labor demand amid economic uncertainty or efforts by businesses to contain costs and decreased labor supply associated with lower immigration, the aging of the population, or reduced labor force participation. Participants generally assessed that, under appropriate monetary policy, the labor market likely would stabilize next year but noted that their outlook for the labor market was still quite uncertain, especially amid the delays in the release of government data. Most participants judged that risks to the labor market remained tilted to the downside. Several participants viewed the rise in the unemployment rates for groups historically more sensitive to cyclical changes in economic activity, the possibility that layoffs could push the unemployment rate sharply higher in a low-hiring environment, or the concentration of job gains in a few less cyclically sensitive sectors as potentially signaling greater fragility in the labor market. Participants observed that overall economic activity appeared to be expanding at a moderate pace. Many participants viewed aggregate consumption spending as solid, although several pointed to signs of some recent slowing. A majority of participants mentioned evidence of stronger spending growth for higher-income households, while lower-income households had become increasingly price sensitive and were making adjustments to their spending in response to the outsized cumulative increase in the prices of basic goods and services over the past several years. A couple of participants remarked that the housing sector showed some signs of stabilizing and that recent declines in mortgage rates would provide support to the sector. Some participants commented that economic activity had also been supported by robust business fixed investment, with several pointing to investment by the technology sector in particular. A couple of participants commented that the agricultural sector continued to face headwinds because of high input costs or reduced capacity in the food processing industry even though prices for many agricultural products had risen over the past year. Several participants noted that there could be swings in measures of economic activity associated with the government shutdown, which could make it more difficult over coming months to determine the underlying trend in growth. Participants generally anticipated that the pace of economic growth would pick up in 2026 and that, in