The Federal Reserve lowered its key interest rate Wednesday by a quarter percentage point, setting the target range between 3.5 percent and 3.75 percent, but highlighted lingering uncertainty about future policy. The 9-3 vote reflected continued divisions among policymakers, with Governor Stephen Miran advocating a half-point cut and regional Presidents Jeffrey Schmid of Kansas City and Austan Goolsbee of Chicago preferring to maintain current levels.
This marks the third consecutive rate reduction, a move widely described as a “hawkish cut” because it comes with cautionary signals. Powell emphasized that the central bank is “well positioned to wait and see how the economy evolves,” noting the decision gives the Fed flexibility to monitor economic data before deciding on further adjustments.
The meeting underscored the ongoing split between hawkish and dovish members. Hawks prioritize containing inflation, while doves aim to support the labor market through lower rates. The statement from the Federal Open Market Committee mirrored language used a year ago, signaling that additional cuts may be limited in the near term.
Markets responded positively to the decision, with the Dow Jones Industrial Average rising roughly 500 points. Treasury yields moved mostly lower following the announcement. Powell described the current rate as “in the high end of the range of neutral” and confirmed that no decision has been made about the January meeting.
Looking ahead, the FOMC’s “dot plot” shows a divided outlook. Officials project only one rate cut in 2026 and another in 2027 before reaching a longer-term target around 3 percent. Seven voting members indicated they prefer no cuts next year, reflecting persistent internal debate over the appropriate path.
The Fed also adjusted its economic forecasts, raising projected GDP growth for 2026 to 2.3 percent, up half a percentage point from the September estimate. Inflation, however, remains above target at 2.8 percent in September, keeping price stability a central concern.
In addition to interest rate changes, the Fed announced a resumption of Treasury purchases, starting with $40 billion in Treasury bills. These measures aim to address pressures in overnight funding markets and are expected to continue for several months before tapering.
Chair Jerome Powell faces added pressure as he nears the end of his second term, with just three meetings remaining before President Donald Trump names a successor. Trump has indicated he will evaluate candidates based on their willingness to favor lower rates. National Economic Council Director Kevin Hassett is currently the frontrunner, with markets pricing his chances at 72 percent.
The Fed’s decisions come amid an unusual backdrop of incomplete data caused by a six-week government shutdown. While official indicators suggest a steady labor market, unofficial data reveal rising layoffs, with over 1.1 million job cuts announced through November, highlighting challenges in gauging the economy’s true trajectory.
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