Federal Reserve Cuts Rates as High Prices Persist Despite Cooling Inflation

2025-12-13 economy

Washington, Saturday, 13 December 2025.
In December 2025, the Federal Reserve announced its third interest rate cut of the year, targeting a range of 3.50%-3.75% as inflation data shows signs of cooling. However, an analytical review reveals a stark contrast between improving macroeconomic indicators and the financial strain felt by American households. Despite the Fed projecting stronger GDP growth of 2.3% for 2026, consumer sentiment remains dampened by a cumulative “sticker shock” affecting essentials like food and housing. With ground beef prices up 14% and housing costs elevated since the current administration took office, the persistent affordability crisis presents a significant political hurdle, challenging the effectiveness of campaign promises to lower costs against the reality of entrenched price levels.

The Divergence of Data and Daily Life

On December 10, 2025, the Federal Open Market Committee (FOMC) lowered the federal funds rate by 25 basis points to a target range of 3.50%-3.75% [5][6]. This decision, marking the third consecutive rate reduction of 2025, was not without controversy; the vote reflected a rare 9-to-3 split, with dissenters arguing for both more aggressive easing and no change at all [4][6]. While Fed Chair Jerome Powell asserted that “disinflation appears to be continuing,” the central bank’s policy statement adopted a cautious tone regarding the “extent and timing” of future adjustments [1][4]. This caution is mirrored in the consumer economy, where the disconnect between official inflation statistics and realized purchasing power is becoming increasingly acute. Despite the headline Consumer Price Index (CPI) rising approximately 1.6% from the presidential inauguration through September—an annualized pace of roughly 2.4%—households are grappling with severe price spikes in essential categories [1].

Sticker Shock in Essentials

The aggregate data masks the specific financial pain points affecting American families. In September, ground beef prices were 14% higher than when President Trump resumed office, and electricity costs had surged over 4% [1]. Furthermore, homeowners insurance is rising at an annual rate of roughly 10%, compounding the financial pressure on households [1]. This sustained “sticker shock” has left consumer sentiment “broadly somber,” according to Joanne Hsu of the University of Michigan, as the cumulative effect of nearly five years of price increases continues to weigh on the public mood [1]. Tariffs have further exacerbated this dynamic, raising overall retail prices by nearly five percentage points relative to pre-tariff trends as of November 2025 [3].

Structural Barriers in Housing

The housing market exemplifies the limitations of monetary policy in addressing structural economic issues. Although the Federal Reserve has implemented rate cuts in September, October, and December, mortgage rates have remained elevated around 6.2% since September [1][5]. The root cause lies in a persistent lack of supply; new building permits were down 11% year-over-year as of August, and housing starts had fallen by 6% [1]. Chair Powell candidly acknowledged this reality, stating, “We just haven’t built enough housing for a long time… We can raise and lower interest rates, but we don’t really have the tools to address a secular housing shortage” [1]. This structural deficit ensures that housing affordability remains a critical bottleneck for the economy, largely immune to the immediate effects of minor rate adjustments.

Economic Projections and Market Outlook

Looking toward 2026, the Federal Reserve’s updated Summary of Economic Projections (SEP) offers a mixed outlook. Policymakers have revised their GDP growth forecast for 2026 upward to 2.3%, a notable increase from the 1.8% projected in September [2]. However, the path to price stability remains long; inflation is not expected to return to the Fed’s 2% target until the end of 2027 [2]. In the interim, Core PCE inflation is projected to hover at 3.0% for 2025 before moderating to 2.5% in 2026 [6]. For investors, the environment remains complex. While the S&P 500 trades at a price-to-earnings ratio of 22.3, international stocks appear more attractively valued at 15.1 times forward earnings [3]. Meanwhile, gold prices surpassed $4,000 an ounce in October 2025, signaling continued investor hedging against volatility [5]. Current expectations suggest the Fed may enact two additional rate cuts totaling 50 basis points in 2026, though the hawkish tilt of recent communications implies these moves will be strictly data-dependent [4].

Sources

Inflation Affordability