Fed Moves Toward Third Rate Cut Amid Division, While Australia Holds Steady: What This Means for Borrowers in 2025

Fed’s Internal Divisions Deepen as a Third Rate Cut Looms

In the waning days of Jerome Powell’s tenure as Federal Reserve Chair, the U.S. central bank finds itself at a crossroads. After a turbulent eight-year run marked by a global pandemic, the highest inflation in four decades, and relentless political pressure, Powell now faces a committee more splintered than ever. As the Federal Open Market Committee (FOMC) gathers for its final meeting of 2025, markets are bracing for what could be a third consecutive interest rate cut—a move that’s anything but unanimous among policymakers.

For Powell, consensus-building has always been a trademark. But with the labor market weakening and inflation still stubbornly above target, those once-aligned voices are diverging. Some regional bank presidents have publicly opposed lowering rates, warning that doing so while inflation drifts further from the Fed’s target could backfire. On the other hand, several board members are increasingly worried about job losses, pushing for a more cautious approach to easing policy.

Records from the Fed’s most recent meetings reveal a committee at odds. In October, “several” policymakers opposed another cut, and dissent is expected again in December. It wasn’t until influential figures like New York Fed President John Williams and San Francisco’s Mary Daly (though not a voter this year) signaled concern for the labor market that markets shifted dramatically—from a 30% to a 90% probability of a December cut, according to CME Group’s FedWatch tool.

Powell’s Legacy and a Looming Succession

This division is unfolding as Powell’s time at the helm winds down, with former President Donald Trump expected to name a successor in early 2026. White House National Economic Council Director Kevin Hassett is emerging as a frontrunner, Bloomberg reports. With Powell’s influence naturally waning as his exit approaches, “soft power” dynamics—the ability to steer consensus—are eroding. If policymakers sense the chair’s tenure is ending, their incentives to rally around his strategy diminish, potentially making it harder for the Fed to deliver clear guidance to investors and the public.

The stakes are high. Should Powell prioritize fighting inflation or cushioning the job market? As San Francisco’s Daly put it, “The Fed can get ahead of inflation more easily than it can get ahead of a deteriorating labor market.” Powell’s choice may hinge on which legacy would be harder to defend: persistent inflation, or an economy slipping into recession as he departs.

Adding to the uncertainty, markets are already watching for signals from the possible new chair, whose views could diverge sharply from Powell’s. That makes forward guidance—projections about where rates might be heading—even more complicated, as noted by Vincent Reinhart, chief economist at BNY Investments.

Australia’s RBA Holds Rates Amid Inflation Jitters

While the Fed grapples with whether to cut, the Reserve Bank of Australia (RBA) is taking a different tack—holding its benchmark rate steady at 3.6% in December. Despite a recent uptick in inflation to 3.8%, the RBA’s board, led by Governor Michele Bullock, unanimously decided to wait and watch. Some of the inflation rise, they argue, is temporary, and the board is prepared to be “patient” before making any further moves.

Yet, the RBA is far from comfortable with the current inflation rate. Bullock emphasized that it would be wrong to assume the central bank has “no appetite” for future hikes. The next policy meeting isn’t until February, and the board will remain agile, responding to fresh data as it emerges. The board’s statement noted the “risks to inflation have tilted to the upside,” and economists point out that high housing and utility costs—less responsive to interest rates—are complicating the inflation fight.

“Keeping rates high weighs on household spending and business investment, helping slow demand,” said Nerida Conisbee, chief economist at Ray White Group. “But these same restrictive conditions are holding back residential construction and discouraging new rental supply, reinforcing the very housing inflation the RBA is trying to control.” This policy paradox leaves the RBA in a bind: rates high enough to tame inflation might actually worsen some of its root causes.

Borrowers Navigate Uncertainty as Central Banks Diverge

For borrowers, these central bank maneuvers are more than headlines—they shape the cost of everything from mortgages to credit cards. If the Fed cuts rates as expected, borrowing costs in the U.S. will have fallen 1.75 percentage points from their 2024 peak, yet still remain above pre-pandemic lows. In Australia, consumers face a prolonged period of high rates, even as wage growth and job markets lag.

So what should you do? Financial planners urge three steps to weather this uncertain environment:

• Pay down high-cost debt: While average U.S. credit card rates have dipped below 20% for the first time since March 2023, relief is modest. Balance transfer offers or nonprofit counseling may help if you’re struggling with larger balances.
• Shop around for loans: Don’t accept the first rate you see—compare offers, and keep your credit score healthy by paying bills on time and using less than 30% of available credit.
• Build your emergency fund: With economic risks on both sides—inflation and possible recession—having at least six months’ expenses set aside can be a crucial safety net. Consider high-yield savings accounts to keep pace with inflation.

Financial markets, meanwhile, remain on edge. In the U.S., attention is already shifting toward the Fed’s future leadership, while in Australia, policymakers face a policy paradox that may require nimble, meeting-by-meeting decisions in the months ahead. As Reuters and ABC News have both noted, the global fight against inflation is far from over, and the path for interest rates in 2026 remains anything but clear.

Assessment: The Fed’s deepening divisions and the RBA’s caution underscore a core truth about monetary policy in 2025: uncertainty reigns. With inflation proving stubborn and labor markets weakening, central banks are walking a tightrope—risking either a resurgence of inflation or a slide into recession. For ordinary borrowers, the lesson is clear: stay nimble, manage debt, and brace for further twists as the world’s monetary guardians weigh every move.