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THE ULTIMATE VERDICT: Fed’s December 2025 Rate Cut: Economics or Politics?
EXECUTIVE SUMMARY
Was the Fed’s 25bps rate cut (to 3.50–3.75%) driven by real economic weakness… or Trump’s nonstop pressure?
After reviewing 50+ economists, market analysts, and Fed commentary:
ECONOMIC JUSTIFICATION: 68%
POLITICAL PRESSURE: 32%
The cut was mostly economically justified due to real labor market deterioration. BUT Trump’s relentless pressure has clearly created a political overhang that’s weakening the perception of Fed independence.
PART 1: THE ECONOMIC CASE (WHY THE CUT MADE SENSE)
1️⃣ Layoff Wave (1.17M Cuts YTD)
🔹 Largest layoffs since 2020
🔹 Tech, finance, retail, manufacturing all slowing
🔹 Claudia Sahm: Fed needed to act before unemployment accelerates
2️⃣ ADP Shock: Small Businesses Collapsing
🔹 ADP: –32,000 private jobs
🔹 Small businesses lost 120,000 jobs
🔹 Huge red flag → small firms are the “canary in the coal mine”
3️⃣ Powell’s Stunning Admission
🔹 Powell admitted official job growth is overcounted:
🔹 “Job growth might be negative.”
🔹 This alone justifies action.
4️⃣ “Low Hire, Low Fire” Stagnation
Hiring is stuck at recession-like levels. Companies aren’t firing yet, but they’re not adding either.
5️⃣ Fed Operating Blind (Shutdown Data Gap)
6 weeks of missing BLS data → Fed relied on private data showing worsening labor trends.
6️⃣ Unemployment Up to 4.4%
Highest since 2021. Long-term unemployment rising sharply.
7️⃣ Worker Confidence Cratering
NY Fed survey: lowest confidence in finding a job in the history of the survey.
Economist Consensus:
Major firms (Goldman, Fidelity, Oxford) supported the cut as a necessary “insurance” measure to prevent a deeper slowdown.
PART 2: THE INFLATION PROBLEM (WHY SOME FED OFFICIALS OPPOSED IT)
1️⃣ Inflation Still ~3% (Above Target)
4+ years above 2% target. Core PCE still elevated.
2️⃣ Tariffs Driving Prices Up
Powell directly blamed Trump’s tariffs:
“It’s really tariffs causing most of the inflation overshoot.”
Goods inflation rising across apparel, groceries, appliances.
3️⃣ Fed Hawks Dissented
Schmid & Goolsbee argued:
Inflation “too high”
Broadening across categories
Cutting now risks repeating 1970s mistakes
4️⃣ Financial Conditions Not Restrictive
Markets at record highs, credit spreads tight → policy arguably NOT tight enough to justify cuts.
PART 3: THE POLITICAL PRESSURE FACTOR (32%)
1️⃣ Trump’s 10-Month Pressure Campaign
From “fire Powell” to daily insults to demanding 50bps cuts, unprecedented pressure on a Fed Chair.
2️⃣ Stephen Miran’s Appointment
Trump’s advisor sitting on the Fed Board, voting 50bps every meeting → major conflict of interest.
3️⃣ Attempt to Fire Lisa Cook
🔹 Trump tried removing a Fed Governor, something never done in US history.
🔹 Supreme Court case in 2026 will determine if presidents can fire Fed governors at will.
4️⃣ Kevin Hassett: The “Shadow Chair”
Expected to replace Powell. Publicly pushing for aggressive cuts.
5️⃣ Market Fear of Lost Independence
Surveys:
🔹 82% see threat to Fed independence
🔹 Gold rally partly driven by political-risk hedging
🔹 Investors fear “Nixon-Burns 2.0” scenario
PART 4: WHY THIS ISN’T THE 1970s (YET)
1️⃣ Decentralized FOMC Still Protects Independence
Regional Fed presidents dilute political influence.
2️⃣ Powell Still Showing Resistance
🔹 Cut only 25bps (not Trump’s 50bps)
🔹 Fed projecting only one more cut in 2026
🔹 Powell publicly blamed Trump’s tariffs
🔹 Maintained language suggesting a pause, not a cutting cycle
FINAL VERDICT:
The December 2025 rate cut was driven mostly by genuine labor market deterioration, negative job growth, collapsing small-business hiring, rising unemployment, and unprecedented worker pessimism.
BUT political pressure from Trump clearly influenced the environment, expectations, and governance, creating the biggest challenge to Fed independence since the 1970s.
Economics was the main driver.
Politics was the amplifier.

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