- A quarter-point cut brings rates to the 3.5% to 3.75% range.
- Three Fed officials disagree, exposing a deepening policy divide.
- GDP forecast for 2026 increases, inflation expectations decrease.
A divided U.S. Federal Reserve cut interest rates on Wednesday for the third straight time this year, signaling concerns in the labor market even as inflation remained elevated due to President Donald Trump’s tariffs.
The quarter-percentage-point cut brings rates to a range of between 3.5% and 3.75%, the lowest in about three years.
The move was in line with market expectations, although the path forward is less certain.
The Federal Reserve planned at least one more rate cut next year and flagged increased risks to jobs when it announced the move Wednesday.
But the rift within the central bank deepened when three officials voted against the modest reduction.
Chicago Fed President Austan Goolsbee and Kansas City Fed President Jeffrey Schmid instead sought to keep rates unchanged. Federal Reserve Governor Stephen Miran backed a larger cut of half a percentage point.
The Federal Reserve’s rate-setting committee is made up of 12 voting members – including seven members of the board of governors, the president of the New York Fed and a rotation of reserve bank presidents – who take a majority vote to decide the path of rates.
On Wednesday, Federal Reserve officials also raised their 2026 GDP growth forecast to 2.3%, from 1.8% previously.
They slightly reduced their inflation expectations for next year and kept unemployment rate expectations unchanged.
These projections could change as the central bank grapples with a delay in releasing federal economic data after a record-long government shutdown.
The Federal Reserve also faces a turbulent year ahead with the arrival of a new chief after Fed Chair Jerome Powell’s term ends in May, while political pressure mounts.
Miran’s term expires in January, creating a vacancy among the top leaders of the Federal Reserve, and Trump has tried to free up another position by trying to fire Federal Reserve Governor Lisa Cook this year.
Cook has challenged his dismissal and the case remains before the courts; meanwhile, he continues to play his role.
Caution ahead
A contentious meeting featuring multiple dissidents is a “normal and healthy” sign, said Ryan Sweet of Oxford Economics.
Still, “more cuts now mean less in the future,” he added in a note this week.
“The central bank will need time to assess how past cuts are impacting the economy,” he said.
Analysts said a third consecutive rate cut was likely to manage risks to the labor market.
“The challenge facing the Fed next year is the potential expansion of unemployment, when GDP rises but employment growth is modest at best,” Sweet said. “This leaves the economy vulnerable to shocks because the labor market is the main firewall against a recession.”
The most recent figures available confirmed a slowdown in the labor market, while the government shutdown from October to mid-November delayed the release of more up-to-date official data.
The Federal Reserve seeks maximum employment and stable prices when adjusting interest rates, although these goals can sometimes conflict. Lower rates tend to stimulate the economy, while higher levels slow activity and reduce inflation.
Powell is scheduled to speak at a news conference following the rate decision announcement.
This week’s meeting is the last before 2026, a year of key changes for the bank.
In a Politico interview published Tuesday, Trump signaled that he would judge Powell’s successor based on whether they cut rates immediately. Interviews for your election are entering the final phase.
Trump previously hinted that he wants to nominate his top economic adviser, Kevin Hassett.
Other top contenders include former Federal Reserve official Kevin Warsh, Federal Reserve governors Christopher Waller and Michelle Bowman, and BlackRock’s Rick Rieder.
