The Fed, divided over where its priorities should be, lowered its key interest rate on Wednesday, but signaled a tough road ahead for further cuts.
In response to expectations for a “hawkish rate cut,” the central bank’s Federal Open Market Committee cut its key overnight borrowing rate by a quarter of a percentage point to a range of 3.5% to 3.75%.
However, the move raised a warning flag about the direction policy could take going forward, with three members voting “no”, something that hasn’t happened since September 2019.
The 9-3 vote again featured hawkish and dovish opposition. Gov. Stephen Millan supported a larger 0.5-point cut, while Kansas City Regional President Jeffrey Schmidt and Chicago President Austan Goolsby supported holding the line. In Fed terminology, hawks are generally more concerned about inflation and support raising interest rates, while doves are more focused on supporting the labor market and want to lower interest rates.
This was the third consecutive “no” vote for Mr. Millan, who will retire from the Fed in January, and the second consecutive “no” vote for Mr. Schmidt. The previous meeting of the three opposition members was also split 2-1, with members divided between the need for monetary policy tightening and easing.
The post-meeting interest rate statement reused language from the FOMC meeting a year ago.
“In considering the scope and timing of further adjustments to the target range for the federal funds rate, the Committee will carefully evaluate available data, evolving prospects, and the balance of risks,” the statement said.
When this language was used in December 2024, it suggested that the Commission had likely completed its immediate cuts. The FOMC then did not approve any rate cuts until its September 2025 meeting.
Fed Chairman Jerome Powell said in a press conference after the board meeting that the latest rate cut puts the Fed in a comfortable position on interest rates.
“We are in a position to wait and see how the economy develops,” Powell said.
Stock prices rose following the decision, with the Dow Jones Industrial Average rising 500 points. Government bond yields have almost fallen.
“We’re at the high end of the spectrum of neutrality,” Powell added. “We just happen to have cut rates three times. We haven’t made any decisions for January, but as I said, I think we’re in a good position to wait and see what happens with the economy.”
With three consecutive interest rate cuts, the focus shifts to where the FOMC goes from here.
The Dot Plot, which closely monitors each official’s interest rate outlook, shows that the federal funds rate would only have to cut once in 2026 and once again in 2027 before reaching its long-term target of around 3%. These forecasts were unchanged from the September update, but reflected divisions within the committee about where interest rates should go.
In addition to the two dovish “no” votes against the rate cut, four non-voting meeting participants also registered “moderate no votes” to indicate that they disagree with the decision. Seven officials also expressed a preference for no cuts next year. The FOMC meeting is attended by 19 people, including the president and regional presidents, of whom 12 vote.
“Our discussions have been as thoughtful and respectful as any I’ve had in my 14 years at the Fed,” Powell said. “It’s only by bringing together people with strong opinions that we can get to a point where we can come together and make decisions.”
On the economy, the committee raised its overall view on gross domestic product (GDP) growth in 2026, raising its September forecast by 0.5 percentage point to 2.3%. The Committee continues to expect inflation to remain above its 2% target through 2028.
As for inflation, prices remain high, with the Fed’s recommended rate at an annualized rate of 2.8% in September, the latest month for which data is available. That’s a long way from the peak a few years ago, but still well below the central bank’s 2% target.
In addition to setting interest rates, the Federal Reserve announced it would resume buying U.S. Treasuries, following an announcement at its October meeting that it would halt balance sheet outflows this month. The move comes amid concerns about pressure in the overnight funding market.
The central bank will begin buying $40 billion in Treasury bills starting Friday. From there, purchases are expected to “remain elevated for several months” and are likely to “decrease significantly” thereafter.
The move comes at a sensitive time for the Fed.
Powell is seeking to maintain consensus among policymakers and is nearing the end of his second term as chairman. There are three more meetings left before giving way to President Donald Trump’s nominee.
Trump is not a man committed to the Fed’s dual mandate of price stability and full employment, and he has signaled that he intends to make his choices a litmus test, using his preference for lower interest rates as a barometer. The president told reporters Tuesday night that he plans to make a choice soon.
Market forecasts predict that the nominee will be National Economic Council Chairman Kevin Hassett, who is viewed by some in financial markets as the Fed chairman who will follow President Trump’s orders. As of Wednesday morning, Mr. Carsi had a 72% chance of agreeing with Mr. Hassett, with former Fed director Kevin Warsh and current Fed director Christopher Waller far behind.
Federal Reserve officials have had to operate in an environment where much of the official data they use for decision-making is far behind schedule or missing altogether due to the nearly six-week government shutdown that ended on Nov. 12.
The data they looked at showed a labor market with fewer hires and fewer layoffs, with employers reluctant to both add to salaries and lay off large numbers of workers. But recent signs from unofficial data point to even more significant job cuts to come, with employment firm Challenger, Gray & Christmas saying more than 1.1 million people will be announced by November.
Correction: Kevin Hassett is the director of the National Economic Council. A previous version had his title incorrectly listed.
