The Fed Is Wasting Ammo

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Deep divisions are emerging within the Federal Reserve.

Last week, the Fed cut interest rates for the third time in a row. The short-term fed funds rate was reduced by 0.25% at the Fed’s final meeting of 2025.

While the market widely anticipated the move, this rate cut wasn’t without controversy. Among the 12 Fed officials voting on interest rates, three did not agree with the decision. That was the largest number of dissenting votes in over five years.

But it’s easy to understand why. Moving the fed funds rate is one of the most important factors for the economy and the stock market.

Yet there’s no reason for the Fed to be cutting rates at this moment. In fact, these rate cuts could come back to haunt the Fed…

The Impact of Interest Rates

The Fed is tasked with pursuing price stability (i.e., low levels of inflation) and full employment (i.e., a healthy job market).

There are a number of ways that the Fed can influence financial conditions and their impact on the economy. But nothing is more effective than adjusting the level of interest rates.

Fed funds is the rate that banks use to lend or borrow from each other overnight. The fed funds rate also impacts lending costs for key debt instruments like the prime rate used for consumer and business loans. The fed funds rate also impacts credit card rates and floating-rate mortgages.

That makes the fed funds rate vital for stimulating economic growth… or slowing things down.

And given the impact on the economy, adjustments to fed funds are a key tool during times of economic crisis… like what we saw in response to the pandemic and 2008’s financial crisis.

It’s so important that merely announcing a big change is often enough to restore confidence during periods of uncertainty – before the impact of falling rates is ever felt in the economy.

Yet at any given moment, the Fed is ultimately constrained by how much it can cut rates. After all, there are only so many cuts it can make before rates go negative. That makes choosing when to use cuts a critical decision.

And I’m convinced that right now, the Fed is wasting its precious ammo.

Wasting the Ammo

The Fed usually makes gradual adjustments to the rate.

During times of economic crisis, outsized rate cuts can help stabilize financial markets and boost sentiment. But as I noted above, the Fed’s ability to use emergency rate cuts is limited by the current level of the fed funds rate.

Think of rate cuts as ammunition for a firearm. A firearm can only hold so much ammo, so you’d better carefully select when to fire. Eventually, the ammo runs out.

It’s a similar tradeoff with interest rates. Once the cuts are used up… that’s it.

The Fed has now cut at three consecutive meetings. But these cuts make little sense.

Inflation remains well above the Fed’s 2% target, and the job market is holding up better than expected. In this environment, what purpose do rate cuts serve?

There’s little reason for the Fed to keep cutting. After all, it may need those cuts to fight a recession down the road.

By wasting ammo now, the Fed is limiting its ability to react if something bad happens ahead.

While I presume we’ll make it through the holidays mostly unscathed, we could be facing a topsy-turvy year in 2026.

With an AI bubble, an uncertain tariff environment, a new Fed chair in May, and midterms late in the year, there are sure to be plenty of reasons we could see markets grow volatile.

And if the job market gets shakier, the Fed may be left wishing it had held on to those bullets a little longer…

Happy Trading,

Larry Benedict
Editor, Trading With Larry Benedict