Fed cuts interest rates, signals pause going into 2026
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The Federal Reserve building in Washington, D.C. Photo: Aaron Schwartz/Bloomberg via Getty Images
The Federal Reserve cut interest rates for the third time this year Wednesday, amid significant internal dissent and signs that further rate cuts next year are likely to be limited.
Why it matters: The Fed has delivered the interest rate relief President Trump has repeatedly demanded, though as chair Jerome Powell approaches his final months in office, the path of policy ahead is clouded in uncertainty.
Driving the news: The policy-setting Federal Open Market Committee lowered its target for the federal funds rate to between 3.5% and 3.75%.
- Three officials dissented from the decision, the most at a policy meeting since 2019. Chicago Fed president Austan Goolsbee and Kansas City Fed president Jeff Schmid favored leaving rates steady, while governor Stephen Miran preferred to cut rates even more aggressively.
- Notably, new projections showed six out of 19 top Fed officials believed it would be more appropriate to leave rates steady this meeting rather than cut.
- Those "shadow dissents" likely include Goolsbee and Schmid, along with officials who either do not have a vote this year or had reservations about the rate cut but not enough to formally vote against it.
What they're saying: Powell signaled that further rate cuts in the months ahead were no guarantee.
- "We are well-positioned to wait to see how the economy evolves," Powell told reporters at a press conference on Wednesday.
- Importantly, Powell noted that the third consecutive rate cut likely means monetary policy is in the range of a neutral stance — meaning it neither stimulates nor restrains the economy.
Between the lines: The divides within the Fed have flared publicly since the last policy meeting at the end of October.
- One faction, led by three Trump-appointed governors, argues that there are signs of incipient weakness in the job market that the Fed should address, and that elevated inflation due to tariffs will prove temporary.
- Another faction, which includes many presidents of reserve banks around the country, see inflation persistently above the Fed's 2% target with little sign it will fall quickly, paired with a job market that has proven surprisingly resilient. They fear further rate cuts will keep inflation from falling further.
- The compromise appears to be enacting this week's cut but keeping options open for 2026.
- "What you see is some people feel we should stop here ... that we're at the right place and should just wait. Some people feel like we should cut once or more this year and next year," Powell told reporters.
The intrigue: Powell's term as chair ends in May, and Trump is actively weighing his replacement, indicating he has already decided on a candidate even as an interview process proceeds.
- The presumed favorite for the job, White House economic adviser Kevin Hassett, said this week he sees steep rate cuts as justified.
- The new projections showed a wide range of views on what should happen to interest rates next year, with seven of 19 officials anticipating rates should end 2026 at or above current levels.
- The median Fed official anticipates only one more rate cut will be appropriate next year, but four of the policymakers expect two, and another three officials see even more rate cuts ahead.
Of note: The FOMC also said it will begin purchasing short-term Treasury securities "as needed" to maintain an ample supply of reserves in the financial system, a step meant to avoid the kinds of year-end flare-up in money markets that occurred in the fall of 2019.
- That implies that, just weeks after the Fed stopped shrinking its balance sheet under its quantitative tightening program, it could again increase it.
- An accompanying statement from the New York Fed said the bank anticipates buying $40 billion in Treasury bills starting Friday.
By the numbers: The Fed's announcement was accompanied by officials' latest economic projections, in which they bumped up their 2026 growth projections and lowered their inflation projections.
- The median official expects 2.3% GDP growth, up from 1.8% projected in September.
- The median policymaker expects inflation to recede next year, to 2.4%, down from a projected 2.9% in 2025.
What to watch: Powell told reporters that tariffs are almost entirely to blame for inflation holding around 3%, about a percentage point higher than the Fed's target.
- "It's really tariffs that are causing the most of the inflation overshoot," Powell said. "We do think those as likely to — in the current situation — be a one-time price increase."
- Powell said that goods-related inflation should peak in the first quarter of next year, assuming there are no major new tariff announcements.
Editor's note: This story has been updated with comments by Powell.
