The Federal Reserve on Wednesday lowered its benchmark interest rate by a quarter percentage point, bringing the federal funds rate to a range of 3.5%–3.75%, the lowest level in over three years. This marks the third consecutive rate cut since September, reducing borrowing costs by a total of 0.75 percentage points in 2025.
The decision, however, came with caution. The 9-3 vote included three dissenting members, highlighting ongoing divisions among policymakers about the balance between supporting the labor market and controlling inflation. Some officials favored holding rates steady, while others pushed for a steeper cut. Fed Chair Jerome Powell described the reduction as a step toward stabilizing the labor market while allowing inflation to gradually trend back toward the Fed’s 2% target.
In a sign that future cuts may be limited, the Fed’s updated economic projections suggest just one additional rate cut in 2026 before rates approach a longer-run target of around 3%. Officials also forecast slightly higher GDP growth of 2.3% next year and expect inflation to cool to 2.4% in 2026, down from an estimated 2.9% in 2025. Unemployment is projected to remain around 4.4%.
The Fed also announced it will resume Treasury purchases, starting at $40 billion, following the halt of its balance sheet runoff in October. This move aims to address pressures in overnight funding markets.
The central bank’s actions come amid ongoing labor market concerns. While official data have been delayed by the recent government shutdown, private payroll figures show continued weakness, with employers cutting 32,000 jobs in November. Economists caution that rate cuts alone are unlikely to resolve structural challenges in hiring and workforce participation.
As Powell nears the end of his term, the Fed faces a critical period of transition. President Donald Trump is expected to soon nominate a successor, with markets speculating that Kevin Hassett may be the leading candidate.
Investors and analysts will now closely watch incoming economic data for guidance on the Fed’s next steps, signaling a more measured approach to future monetary policy after this week’s “hawkish cut.”
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