The Fed, divided over where its priorities should be, lowered its key interest rate on Wednesday, but signaled a tough road ahead for further cuts.
In response to expectations for a “hawkish rate cut,” the central bank’s Federal Open Market Committee cut its key overnight borrowing rate by a quarter of a percentage point to a range of 3.5% to 3.75%.
However, the move raised a warning flag about the direction policy could take going forward, with three members voting “no”, something that hasn’t happened since September 2019.
The 9-3 vote again featured hawkish and dovish opposition. Gov. Stephen Milan supported a larger 0.5-point cut, while Kansas City’s Jeffrey Schmidt and Chicago’s Austan Goolsby supported holding the line. In Fed terminology, hawks are generally more concerned about inflation and support raising interest rates, while doves are more focused on supporting the labor market and want to lower interest rates.
This was the third consecutive “no” vote for Mr. Millan, who will retire from the Fed in January, and the second consecutive “no” vote for Mr. Schmidt. The previous meeting of the three opposition members was also split 2-1, with members divided between the need for monetary policy tightening and easing.
The post-meeting interest rate statement reused language from the FOMC meeting a year ago.
“In considering the scope and timing of further adjustments to the target range for the federal funds rate, the Committee will carefully evaluate available data, evolving prospects, and the balance of risks,” the statement said.
When this language was used in December 2024, it suggested that the Commission had likely completed its immediate cuts. The FOMC then did not approve any rate cuts until its September meeting.
The FOMC has decided to cut interest rates for the third time in a row, and although there is little room for further rate cuts, the focus has shifted to where the FOMC will go in the future.
The Dot Plot, which closely monitors each official’s interest rate outlook, shows that the federal funds rate would only have to cut once in 2026 and once again in 2027 before reaching its long-term target of around 3%. These forecasts were unchanged from the September update, but reflected divisions within the committee about where interest rates should go.
In addition to the two dovish “no” votes against the rate cut, four non-voting meeting participants also registered “moderate no votes” to indicate that they disagree with the decision. Seven officials also expressed a preference for no cuts next year. The FOMC meeting is attended by 19 people, including the president and regional presidents, of whom 12 vote.
On the economy, the committee raised its overall outlook for gross domestic product (GDP) in 2026, raising its September forecast by 0.5 percentage point to 2.3%. The Committee continues to expect inflation to remain above its 2% target through 2028.
As for inflation, prices remain high, with the Fed’s recommended rate at an annualized rate of 2.8% in September, the latest month for which data is available. That’s a long way from the peak a few years ago, but still well below the central bank’s 2% target.
In addition to its interest rate decisions, the Fed announced it would resume buying U.S. Treasuries, following an announcement at its October meeting that it would halt balance sheet outflows this month. The move comes amid concerns about pressure in the overnight funding market.
The central bank will begin buying $40 billion in Treasury bills starting Friday. From there, purchases are expected to “remain elevated for several months” and are likely to “decrease significantly” thereafter.
The move comes at a sensitive time for the Fed.
Chairman Jerome Powell is seeking to maintain consensus among policymakers and is nearing the end of his second term as chairman. There are three more meetings left before giving way to President Donald Trump’s nominee.
President Trump is not a man committed to the Fed’s dual mandate of price stability and full employment, and has signaled that he will use his choice to support low interest rates as a litmus test. The president told reporters Tuesday night that he plans to make a choice soon.
Market forecasts predict that the nominee will be National Economic Council Chairman Kevin Hassett, who is viewed by some in financial markets as the Fed chairman who will follow President Trump’s orders. As of Wednesday morning, Mr. Carsi had a 72% chance of voting in favor of Mr. Hassett, with former Fed director Kevin Warsh and current Fed director Christopher Waller far behind.
Federal Reserve officials have had to operate in an environment where much of the official data they use for decision-making is far behind schedule or missing altogether due to the government shutdown that lasted until Nov. 12.
The data they looked at showed a labor market with fewer jobs and fewer layoffs, with employers reluctant to hire more people or lay off large numbers of workers. But recent signs from unofficial data point to even deeper layoffs to come, with more than 1.1 million layoffs announced through November, according to employment agency Challenger, Gray & Christmas.
