- The Federal Reserve cut interest rates on Wednesday, but signaled no further cuts in the short term.
- Projections show a single rate cut next year amid economic growth expectations.
- Disagreement among policymakers highlighted challenges in future monetary policy decisions.
WASHINGTON — A sharply divided Federal Reserve cut interest rates on Wednesday but signaled borrowing costs are unlikely to drop further in the near term as it awaits clarity on the direction of a job market showing signs of softening, inflation that "remains somewhat elevated" and an economy it sees picking up steam next year.
New policymaker projections issued after the central bank's final two-day meeting of 2025 showed a median expectation for a single quarter-percentage point cut next year, the same as in September. But it was accompanied by a wide range of estimates that starkly illustrated the depth of disagreement about where to take monetary policy in 2026 and beyond in an economy being reshaped by President Donald Trump's policies and an artificial intelligence investment boom.
"In considering the extent and timing of additional adjustments to the target range for the federal funds rate, the committee will carefully assess incoming data," the rate-setting Federal Open Market Committee said in a policy statement that was tweaked to add language that in the past has been used to signal a pause in policy actions, an outlook at odds with market expectations still leaning toward two rate cuts in 2026.
Policymakers' refreshed estimates, hindered by incomplete data about the economy after a six-week government shutdown, also showed they expect inflation to slow to around 2.4% by the end of next year, even as economic growth accelerates to an above-trend 2.3% and the unemployment rate remains at a moderate 4.4%, an outlook that should dispel worries about potential stagflation that have persisted this year.
The wide disagreement on the appropriate policy for such an environment also showed how challenging it could be to build a consensus in a policymaking body about to experience a leadership change, with Trump expected to nominate a successor to Fed Chair Jerome Powell within the next few weeks.
3 policymakers dissent
In a press conference after the meeting, Powell said: "I would note that having reduced our policy rate by 75 basis points since September and 175 basis points since last September, the fed funds rate is now within a broad range of estimates of its neutral value, and we are well positioned to wait to see how the economy evolves."
Powell, who repeatedly referenced being in a strong position to wait on the next move, added, though, that Fed officials have made no decision about what to do with rates at their next policy meeting in late January.
Major stock indices closed higher, while the dollar weakened against a basket of currencies and Treasury yields dropped.
"The 25-basis point rate cut was widely expected and the economic projections remain optimistic. I would view this as a semi-dovish, cautious statement," said Peter Cardillo, chief market economist at Spartan Capital Securities. "The markets are applauding this decision."
Other analysts pointed to the wide range of policymaker views on the outlook for rates.
"It's definitely a hawkish cut, not so much in the fact that we had two dissenters that wanted to stand pat, but if you look at the 'dot plot,' there were six of them that penciled in no rate cut at this meeting," said Art Hogan, chief market strategist at B. Riley Wealth. The dot plot graphic of Fed policymaker rate-path projections showed six "dots" at 3.9%, where the policy rate was before the rate cut on Wednesday.
The decision to lower the benchmark policy rate by a quarter of a percentage point to the 3.50%-3.75% range drew three dissents, with Chicago Fed President Austan Goolsbee joining Kansas City Fed President Jeffrey Schmid in arguing the policy rate should be left unchanged, and Fed Gov. Stephen Miran again advocating a larger half-percentage point reduction.
How monetary policy evolves from here, heading into a midterm election year that could revolve around the performance of the economy and with Trump urging sharper rate reductions, will now hinge on data that is still lagging from the impact of the 43-day federal government shutdown in October and November.
Solid 2026 economic outlook
The projections are in a sense optimistic: Interest rates may remain higher than anticipated, but the economy is seen growing faster even as inflation falls, and the jobless rate also eases lower.
But the latest policy statement and projections were crafted without the benefit of recent job and inflation reports, and instead relied on "available indicators," which Fed officials have said include their own internal surveys, community contacts and private data.
The most recent official data on unemployment and inflation is for September, and showed the unemployment rate rising to 4.4% from 4.3%, while the Fed's preferred measure of inflation also increased slightly to 2.8% from 2.7%. The Fed has a 2% inflation target, but the pace of price increases has risen steadily from 2.3% in April, a fact at least partly attributable to the pass-through of rising import taxes to consumers and a driving force behind the central bank's policy divide.
In considering the extent and timing of additional adjustments to the target range for the federal funds rate, the committee will carefully assess incoming data.
–Federal Open Market Committee policy statement
Job and inflation data for November will be released next week, followed later by a detailed report of economic growth for the third quarter.
"Available indicators suggest that economic activity has been expanding at a moderate pace," the Fed's policy statement said. "Job gains have slowed this year, and the unemployment rate has edged up through September," it said, dropping a reference to the jobless rate as "low."
The updated projections showed a core of six policymakers preferring no rate cut this year, and seven anticipating no further cuts in 2026.
The median projection is for one additional quarter-percentage point cut in 2027 as well, as inflation continues to subside towards the central bank's 2% target.
"Given the lack of consensus on the committee displayed today, along with the slow release of traditional economic data, and the arrival of a new Fed chair early in 2026, we think the Fed is likely to remain on hold for a while, although continued softness in some of the labor indicators can certainly bring another 25-basis point cut into the mix for January," said Rick Rieder, chief investment officer for global fixed income at BlackRock and one of the five finalists Trump is considering as a successor to Powell.
Contributing: Michael S. Derby, Saqib Ahmed and Stephen Culp
