The Federal Reserve has cut rates by 25 basis points to 3.5-3.75%, marking the third reduction in 2025 and the lowest level in around three years.
Following yesterday’s Federal Open Market Committee (FOMC) meeting, Fed chair Jerome Powell reiterated his September message that “there are no risk-free paths” in policy. The central bank currently faces a trade-off between above-target inflation and a softening labour market.
The FOMC’s statement added: “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 evolving outlook and the balance of risks.”
The phrase ‘the extent and timing of’ was added to the statement, interpreted by some economists as a signal that the Fed could pause until there is more data to support further cuts in 2026.
The decision to cut rates drew more opposition than the previous meeting in October - nine members voted for the cut while three dissented.
Two members (Kansas City Fed president Jeffrey Schmid and Chicago Fed president Austan Goolsbee) preferred no change. Stephen Miran, the ultra-dovish Fed governor, argued for a 50-basis point cut.
This compares to October’s 10-2 vote. In that meeting, Miran and Schmid had dissented.
PIMCO economists Tiffany Wilding and Allison Boxer said: “In the weeks since the previous meeting in October, several Fed officials had expressed discomfort with further rate cuts. Indeed, two officials dissented outright at this meeting by voting to hold the rate steady (and one official voted to cut 50 basis points).
“Four officials used the new economic projections – or ‘dot plot’ – to show they would have preferred to pause in December. Consistent with this sentiment, the statement changes reflected a committee poised to hold rates steady after cutting rates by 75 basis points over the past three meetings.”
Atakan Bakiskan, US economist at Berenberg, pointed out that three votes against the majority decision mean the Fed has had as many dissents since July as it had over the preceding 47 meetings.
“A fragmented Fed will most probably shape next year as well,” Bakiskan said.
“The Fed statement adopted a slight hawkish tone and added the new phrase ‘the extent and timing of’ to describe potential additional adjustments to the target range for the federal funds rate - the same language the Fed used in December 2024 when it signalled a pause in rate cuts, which lasted until September of this year.”