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

The Federal Reserve cut its key interest rate for the third consecutive time on Wednesday, reducing it by a quarter-point to approximately 3.6%, the lowest level in nearly three years. However, the central bank signaled it might keep rates unchanged in coming months, a stance that could draw criticism from President Donald Trump, who has repeatedly called for significant reductions in borrowing costs.

The decision, announced after a two-day meeting of the Fed’s rate-setting committee, was accompanied by quarterly economic projections indicating that officials expect to implement just one rate cut next year. The move comes as the Fed navigates the complex terrain between persistent inflation and signs of a cooling labor market.

Lower Fed rates typically translate into reduced borrowing costs for mortgages, auto loans, and credit cards over time, though market conditions can also influence these rates independently.

The rate cut decision revealed deep divisions among Fed officials, with three dissenters marking the highest number in six years for a body that traditionally operates by consensus. Two officials voted to maintain current rates, while Stephen Miran, a recent Trump appointee, pushed for a more aggressive half-point reduction.

December’s upcoming meeting may usher in an even more contentious period for the central bank. Officials are increasingly divided between those who favor further rate cuts to stimulate hiring and those who prefer maintaining current rates given inflation’s persistence above the Fed’s 2% target. These divisions are likely to continue unless inflation clearly subsides or unemployment worsens significantly.

Adding to the uncertainty, Trump could name a new Fed chair as early as later this month to replace Jerome Powell when his term expires in May. Trump’s appointee would likely advocate for more aggressive rate cuts than many current officials support.

The internal divisions were starkly illustrated in the Fed’s economic projections, where the 19 members of the rate-setting committee showed widely divergent views on future policy. Seven projected no cuts next year, while eight forecast two or more reductions, and four supported just one cut. Only 12 of these 19 members vote on rate decisions.

The Fed’s deliberations took place against a backdrop of elevated inflation that continues to strain many American households. Powell has previously acknowledged these hardships, noting they reflect the sharp overall price increases since the COVID-19 pandemic began. Consumer prices have jumped 25% during that period.

Recent government data showed the Fed’s preferred inflation gauge remained elevated in September, with both overall and core prices rising 2.8% from a year earlier. While significantly lower than the inflation spikes of three years ago, these increases continue to burden many households following the substantial run-up since 2020.

The Fed faces additional challenges as job growth has slowed markedly this year, with the unemployment rate rising for three consecutive months to 4.4%. Though still historically low, this represents the highest rate in four years. Economists describe the current conditions as a “low hire, low fire” job market, with companies reluctant to add staff but also avoiding major layoffs.

The recent government shutdown has further complicated the Fed’s decision-making by delaying economic data. When officials next meet in late January, they’ll have up to three months of backlogged reports to consider. If these figures reveal a deteriorating job market, the Fed might implement another rate cut in January. Conversely, if employment stabilizes while inflation remains high, they could pause further cuts for several months.

Trump’s impending selection of a new Fed chair adds another layer of complexity. In an interview with Politico published Tuesday, Trump indicated that immediate rate reductions would be a “litmus test” for Powell’s replacement. He has suggested he will likely nominate Kevin Hassett, his former top economic adviser, for the position.

Hassett has generally advocated for lower interest rates, but has recently been more cautious in his public statements. During a Tuesday CNBC interview, when asked about future rate cuts, he avoided specifics, saying, “What you need to do is watch the data.”