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THE U.S. Federal Reserve has lowered its benchmark interest rate by a quarter of a percentage point but warned that borrowing costs are unlikely to fall further soon, as policymakers wait for firmer evidence on a labour market losing momentum, inflation that “remains somewhat elevated”, and an economy expected to quicken next year.
Reuters reported on Thursday that at the close of the Fed’s final two-day meeting of 2025, new projections pointed to just one quarter-point rate cut in 2026, unchanged from September’s forecast.
Yet the accompanying scatter of estimates revealed deep divisions over the future of US monetary policy in an economy being reshaped by President Donald Trump’s policies and a powerful wave of investment in artificial intelligence.
“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 Federal Open Market Committee said.
The statement included language historically associated with a pause in policy moves, placing the Fed at odds with market expectations that still lean towards two cuts in 2026.
The projections, prepared after a six-week government shutdown that left officials without key economic data, suggest inflation may fall to around 2.4% by the end of next year, even as growth rises to 2.3% and unemployment holds at 4.4%. The outlook appears to lessen fears of stagflation that have lingered throughout the year.
The internal divisions, however, underline how difficult it may be to forge consensus in a central bank preparing for a leadership change, with Trump expected to nominate a successor to Chair Jerome Powell in the coming weeks.
Three Dissenting Voices
Powell emphasised caution at his press conference. “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,” he said.
He stressed no decision had been taken on what to do at the next meeting in late January.
Wall Street welcomed the move: major stock indices closed higher, the dollar eased, and Treasury yields slipped.
“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 of Spartan Capital Securities. “The markets are applauding this decision.”
Others drew attention to the breadth of disagreement. “It’s definitely a hawkish cut … if you look at the ‘dot plot,’ there were six of them that pencilled in no rate cut at this meeting,” said Art Hogan of B. Riley Wealth.
The cut to a 3.50%–3.75% range drew three dissents. Chicago Fed President Austan Goolsbee and Kansas City Fed President Jeffrey Schmid argued for holding rates steady, while Governor Stephen Miran again pushed for a larger half-point reduction.
Future policy will depend heavily on delayed data, still recovering from October and November’s 43-day shutdown, as the US heads into a midterm election year in which Trump is pressing publicly for sharper rate cuts.
2026 Outlook Appears Robust
Despite incomplete data, the Fed’s latest projections portray an economy expanding at a healthy clip as inflation cools and unemployment gradually eases. But the policymaking statement relied on “available indicators”, including internal surveys, community contacts and private-sector data, rather than fresh government releases.
The most recent official figures, from September, showed unemployment rising to 4.4% from 4.3%, and the Fed’s preferred inflation gauge ticking up to 2.8% from 2.7%. Inflation has crept higher since April’s reading of 2.3%, partly owing to the pass-through of rising import taxes to consumers—an issue that has contributed to the Fed’s growing split.
New employment and inflation figures for November are due next week, followed by a detailed estimate of third-quarter growth.
“Available indicators suggest that economic activity has been expanding at a moderate pace,” the Fed said. “Job gains have slowed this year, and the unemployment rate has edged up through September.” The statement dropped the previous reference to unemployment as “low”.
The updated projections indicate six policymakers opposed any rate cuts this year, and seven expect no further reductions in 2026. The median forecast points to one additional quarter-point cut in 2027 as inflation moves closer to the 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,” said Rick Rieder, chief investment officer for global fixed income at BlackRock and one of the candidates Trump is considering to replace Powell.
“However, continued softness in some of the labour indicators can certainly bring another 25-basis-point cut into the mix for January.” - December 11, 2025