The Federal Reserve cut interest rates three times in 2025, beginning in September. 2025 was a challenging year for the Federal Reserve, as the uncertainties of the impact of tariffs on inflation contrasted with a softening labor market, created a dichotomy for the direction of Federal Reserve policy. In September, in response to the softening labor market, the Federal Reserve implemented its first rate cut of the year, lowering the fed funds rate by 25 basis points to a target range of 4.00-4.25. Two more 25-basis point cuts occurred in October and December, lowering the fed funds target range to 3.50-3.75. No rate cuts occurred in the first quarter of 2026. On May 15, 2026, the term of the current Chairman of the Federal Reserve, Jerome Powell, is scheduled to end. President Trump has clearly indicated that he favors more interest rate cuts from the next Fed chair. In 2026 the Federal Reserve has been reluctant to cut interest rates further, as the combination of tariffs and spike in energy costs due to the Iran war created increased inflationary concerns. Inflation remains above the Fed’s target 2% level. The process for selecting the next Chair, who serves a four-year term, involves being nominated by the President and then confirmed by the Senate. Exactly how that process will play out remains to be seen. The financial markets have generally viewed the ability of the Federal Reserve to operate independently, without interference from Congress or the President, as critically important to the long-term growth of the United States economy and financial market performance. The degree of future Federal Reserve independence also remains to be seen. U.S. Debt and Deficits Except for a brief period between 1998 and 2001 when the U.S. was enjoying excellent economic growth and the tech boom in its internet infancy, the United States has had budget deficits since 1980. To finance a budget deficit, the government borrows money from the public through the issuance of U.S. government debt called U.S. Treasury securities. The Total Public (Federal) Debt Outstanding represents the total (principal) amount of Treasury securities outstanding issued by the federal government. Generally, the public (federal) debt outstanding reflects the accumulation of budget deficits, with subsequent budget deficits increasing the total public (federal) debt outstanding. The graph below shows the relationship between federal budget deficits and the total public (federal) debt. The blue line (left axis) indicates the total federal debt outstanding; the green line (right axis) shows the budget deficits or surpluses that have occurred since 1980. Growing federal debt is becoming an increasing problem for the United States and threatens future program funding, including mandatory programs (including Social Security, Medicare, and Medicaid), and discretionary programs (defense and nondefense programs). Federal Budget Surplus or Deficit; Total Public Debt 1980-2025 (millions of dollars) (Source: Graph from Federal Reserve Economic Database (FRED) based on data from the U.S. Office of Management and Budget and Treasury)
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Center for Business and Economic Insight
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