The Fed trims rates again, but the road ahead remains unclear
The U.S. Federal Reserve has decided to lower interest rates for the third time this year, even as internal disagreements cloud predictions about further cuts in the near term. On Wednesday, the central bank reduced its target federal funds rate by 0.25 percentage points, bringing the range to 3.50%–3.75—its lowest in three years.
Yet policymakers clash over how to balance competing priorities: a softer job market on one side and still-robust inflation on the other.
The Fed’s latest projections, released Wednesday, imply there could be one more rate cut next year, though fresh data could alter that outlook.
Fed Chair Jerome Powell emphasized that the committee needs time to observe how this year’s three rate reductions influence the broader economy. He noted that officials will scrutinize incoming data ahead of the January meeting.
"We are well-positioned to wait and see how the economy evolves," Powell said at a press briefing.
For those hoping for continuous declines in borrowing costs—including President Donald Trump—the wait may continue.
Powell described the current situation as very challenging, with inflation and unemployment both posing risks. He warned that it’s difficult to achieve divergent goals at once: you can’t pursue two major objectives simultaneously without trade-offs.
The rate cut on Wednesday was not unanimous, highlighting growing differences among Fed members about the economic outlook.
Three officials dissented:
- Stephen Moore (on leave from leading Trump’s Council of Economic Advisers) favored a larger 0.50 percentage point cut.
- Austan Goolsbee, president of the Federal Reserve Bank of Chicago, and Jeffrey Schmid, president of the Federal Reserve Bank of Kansas City, preferred holding rates steady.
Trump, who has repeatedly urged a deeper cut, said the reduction could have been even larger, arguing, "Our rates should be much lower. We should have the lowest rates in the world."
A prolonged U.S. government shutdown, ending in November, created a data gap that leaves policymakers partly in the dark about the economy’s current state. Yet concerns about a cooling job market appear to outweigh inflation fears for now.
Labor Department figures released in a late report showed the unemployment rate rising from 4.3% to 4.4% in September. The rate cut is aimed at stimulating hiring by reducing borrowing costs for businesses.
Earlier this year, tariffs raised concerns about inflation, as Trump pressed ahead with broad import levies on major trading partners. Inflation remains above the Fed’s 2% target, having climbed to 3% in September—the first time since January that level was reached.
But as tariffs appear to have pushed some prices higher, recent inflation readings have been softer than expected, allowing the Fed to emphasize labor-market support by easing policy.
Dissent within the Fed persists about the path forward. Powell acknowledged that it’s unusual to see persistent tensions between the Fed’s dual mandates of stable prices and maximum employment.
When tensions rise, Powell says, the group tends to engage in thoughtful, respectful debate and ultimately finds a consensus.
The Fed’s dot plot—the quarterly forecast—shows the median expectation of one additional 0.25 percentage point cut in 2026, a projection unchanged from September.
Markets will likely gain more clarity next week with the release of November labor-market and inflation data. New figures could sway policymakers toward further easing if the job market shows signs of softening.
Who's next at the helm of the Fed?
Trump’s consideration of a successor to Fed Chair Powell, with Powell’s term ending next May, adds another layer of uncertainty to policy direction. A decision could come within weeks.
Kevin Hassett, a veteran conservative economist who has advised the Trump administration, is widely viewed as a leading candidate to replace Powell. Hassett has a track record of defending Trump’s economic approach and is known for backing the administration’s handling of the Fed, though some analysts question whether he would act with full independence.
Other names in the mix include Kevin Warsh, current Fed Governor Christopher Waller, and Treasury Secretary Scott Bessent. Some observers warn that a choice perceived as overly aligned with political objectives could unsettle markets and increase volatility.
Powell responded firmly to questions about whether Trump’s ongoing search for a new chair is shaping his thinking, replying with a clear, concise "no."
But the broader question remains: how will the Fed navigate growth, inflation, and political pressure in a year when both the job market and prices are sending mixed signals? And what stance will the next chair take on rates as unemployment and inflation continue to evolve? Would you support keeping rates steady a bit longer to gather more data, or should policymakers lean toward additional easing to bolster hiring even if inflation remains stubbornly above target?
