Federal Reserve cuts key rate but signals higher bar for future reductions

Wednesday's cut reduced the rate by a quarter-point to about 3.6%, the lowest it has been in nearly three years. Lower rates from the Fed can bring down borrowing costs for mortgages, auto loans, and credit cards over time, though market forces can also affect those rates.

Three Fed officials dissented from the move, the most dissents in six years and a sign of deep divisions on a committee that traditionally works by consensus. Two officials voted to keep the Fed's rate unchanged, while Stephen Miran, whom Trump appointed in September, voted for a half point cut.

December’s meeting could usher in a more contentious period for the Fed. Officials are split between those who support reducing rates to bolster hiring and those who’d prefer to keep rates unchanged because inflation remains above the central bank’s 2% target. Unless inflation shows clear signs of coming fully under control, or unemployment worsens, those divisions will likely remain.

And Trump could name a new Fed chair as soon as later this month to replace Powell when his term ends in May. Trump’s new chair is likely to push for sharper rate cuts than many officials may support.

A stark sign of the Fed’s divisions was the wide range of cuts that the 19 members of the Fed’s rate-setting committee penciled in for 2026. Seven projected no cuts next year, while eight forecast that the central bank would implement two or more reductions. Four supported just one. Only 12 out of 19 members vote on rate decisions.

At a press conference following the announcement of the rate cut, Powell signaled that the Fed may hold off on cutting rates at least in January, and said Fed officials “will carefully evaluate the incoming data,” adding that the Fed is "well positioned to wait to see how the economy evolves.” He did, however, rule out an increase in rates.

"What you see is some people feel we should stop here and we’re in the right place and should wait, and some people think we should cut more next year,” Powell said.

The Fed met against the backdrop of elevated inflation that has frustrated many Americans, with prices higher for groceries, rents, and utilities. Consumer prices have jumped 25% in the five years since COVID.

“We hear loud and clear how people are experiencing really high costs," Powell said Wednesday. "A lot of that isn’t the current rate of inflation, a lot of that is imbedded high costs due to higher inflations in 2022-2023.”

In a delayed report last week, the government said the Fed’s preferred inflation gauge remained high in September, with both overall and core prices rising 2.8% from a year earlier. That is far below the spikes in inflation three years ago but still painful for many households after the big run-up since 2020.

The Fed typically keeps its key rate elevated to combat inflation, while it often reduces borrowing costs when unemployment worsens to spur more spending and hiring.

Adding to the Fed's challenges, job gains have slowed sharply this year and the unemployment rate has risen for three straight months to 4.4%. While that is still a low rate historically, it is the highest in four years. Layoffs are also muted, so far, as part of what many economists call a “low hire, low fire” job market.

“It’s a labor market that seems to have significant downside risks," Powell told reporters. "People care about that. That’s their jobs.”

Powell also noted the Fed has gotten little data on inflation since September. He said Fed officials have seen a pick-up in goods inflation, which he tied to tariffs.

“If you get away from tariffs, inflation is in the low 2s," Powell said, adding that the tariff-related increases should be a one-time event.

The lack of economic data since the government shutdown ended Nov. 13 has contributed to the divisions at the Fed. But when Fed officials next meet in late January, they’ll have up to three months of backlogged reports to consider. If those figures show that the job market has worsened, the Fed could reduce rates again in January.

By contrast, if hiring has stabilized while inflation remains elevated, they may hold off on additional cuts for several months.

The Fed met against the backdrop of Trump’s move to name a new Fed chair to replace Powell in May.

In an interview with Politico published Tuesday, Trump said “yes” when asked if reducing rates “immediately” was a litmus test for a new Fed chair. Trump has hinted that he will likely pick Kevin Hassett, his top economic adviser.

Hassett has often called for lower borrowing costs, but this week has been more circumspect. In an interview Tuesday on CNBC, when asked how many more rate cuts he would support, Hassett did not give a specific answer and said, “What you need to do is watch the data.”