- A quarter-point reduction brings rates to a range of 3.5% to 3.75%.
- Three Fed officials disagree, revealing a deepening political divide.
- GDP forecasts for 2026 have been raised and inflation expectations have eased.
The divided U.S. Federal Reserve on Wednesday cut interest rates for the third consecutive time this year, easing labor market concerns even as inflation remained high due to tariffs imposed by President Donald Trump.
The quarter-percentage-point cut brings rates back to a range 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 Fed plans at least one more rate cut next year and signaled heightened risks to employment when it announced its decision Wednesday.
But the divide within the central bank widened 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. Fed Governor Stephen Miran supported a deeper cut, of half a percentage point.
The Fed’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 vote by majority to decide what rates should move.
On Wednesday, Fed officials also raised their GDP growth forecast for 2026 to 2.3%, up from 1.8% previously.
They slightly eased their inflation expectations for the following year and kept their unemployment rate expectations unchanged.
Those projections could change as the central bank grapples with a delay in releasing federal economic data after a record government shutdown.
The Fed also faces a turbulent year with the arrival of a new leader after Fed Chairman Jerome Powell’s term ends in May, while political pressure mounts.
Miran’s term expires in January, creating an opening among the Fed’s top executives, and Trump has sought to free up another seat by attempting to fire Fed Governor Lisa Cook this year.
Cook challenged her ouster and the matter remains before the courts – she continues to fulfill her role in the meantime.
Be careful ahead
A contentious meeting that sparks multiple dissents is a “normal and healthy” sign, said Ryan Sweet of Oxford Economics.
Still, “more cuts now mean fewer cuts later,” he added in a note this week.
“The central bank will need time to assess the impact of past budget cuts on the economy,” he said.
Analysts said a third straight rate cut was likely, to manage risks to the labor market.
“The challenge facing the Fed next year is the possible expansion of unemployment, when GDP is growing but employment gains are modest at best,” Sweet said. “This leaves the economy vulnerable to shocks, as the labor market is the main firewall against a recession.”
The most recent figures available confirmed a slowdown in the jobs market, while the government shutdown from October to mid-November delayed the release of more updated official data.
The Fed aims for maximum employment and stable prices by adjusting interest rates, although these goals can sometimes be contradictory. Lower rates generally stimulate the economy while higher levels dampen activity and dampen inflation.
Powell is scheduled to speak at a news conference after the rate decision is announced.
This week’s gathering is the last before 2026, a year of key changes for the bank.
In an interview with Politico published Tuesday, Trump indicated he would judge Powell’s successor on whether he would cut rates immediately. The interviews for his choice are entering the final phase.
Trump had earlier hinted that he wanted to nominate his top economic adviser, Kevin Hassett.
Other top contenders include former Fed official Kevin Warsh, Fed Governors Christopher Waller and Michelle Bowman, and BlackRock’s Rick Rieder.
