A Split Fed Cuts Interest Rates But Signals It's Likely To Pause

A divided Federal Reserve voted to lower interest rates again on Wednesday, but officials signaled that another cut won't be immediate, ratcheting up tensions with President Donald Trump.

The decision to reduce rates by a quarter point was hotly debated within the central bank, but Fed Chair Jerome Powell was able to corral his rate-setting committee into moving forward with one more cut, the third time the central bank has lowered borrowing costs this year. The central bank's benchmark rate is now at a range of 3.5 percent to 3.75 percent, the lowest in three years.

Still, three Fed policymakers dissented: Chicago Fed President Austan Goolsbee and Kansas City Fed President Jeffrey Schmid wanted to hold rates steady, while Fed board member Stephen Miran — who is on unpaid leave from his job as White House chief economist — would have preferred a larger cut.

Trump has aggressively advocated for rate cuts all year and hounded Powell for not doing so faster. The Fed chief's term atop the central bank ends in May, and the president told POLITICO on Monday that his future Fed chair should cut rates immediately, going so far as to say it would be a litmus test for his ultimate choice of a nominee.

At an event with CEOs on Wednesday, Trump signaled his displeasure that the rate cut was not larger. The reduction “could have been doubled,” the president said.

But the central bank is facing two great risks that it isn't designed to address simultaneously: a weakening job market and elevated inflation, a combination that is leading to an unusually high level of disagreement within the normally consensus-oriented institution.

Those divisions are set to deepen next year as Fed officials debate the extent to which the labor market needs a boost and how much to slash borrowing costs when inflation remains stubbornly above the central bank's 2 percent target. Policymakers penciled in only one more cut next year — although some didn't envision lowering rates at all in 2026 while others thought the Fed might cut by more.

In his post-meeting press conference, Powell said Fed officials moved to cut rates because they were more worried about hits to the labor market since price increases, for now, are driven more by tariffs. That characterization is at odds with what the administration has argued.

“We will deliver 2 percent inflation, but it is a complicated, unusual, difficult situation, where the labor market is also under pressure, where job creation may actually be negative,” he said. Whereas, when it comes to prices, “it is really tariffs that is causing most of the inflation overshoot.”

He said central bank policymakers still expect tariffs to lead to one-time adjustments in prices, but “our job is to make sure that it is, and we will do that job.”

The rate-setting committee, in its post-meeting statement, suggested that it is uncertain when and how much it might cut rates again, in a shift from previous language.

Powell confirmed that the Fed was signaling a pause. “We are well-positioned to wait to see how the economy evolves,” he said. He also suggested that the central bank has lowered rates to the point that it might not be restraining economic growth anymore, leaving open the possibility that the Fed might not lower borrowing costs further.

There are plenty of ways the economy might develop that could push the Fed away from more rate cuts, especially if inflation picks up.

Fed officials in their quarterly projections boosted their forecast of how much the U.S. economy will grow next year to 2.3 percent, up from a 1.8 percent estimate in September. Powell said this partially reflected an expectation that productivity would be higher, due to artificial intelligence and other factors.

They were also slightly more optimistic about inflation, although they still don't expect to get all the way back to their 2 percent target until 2028.