WASHINGTON--A sharply divided Federal Reserve cut interest rates on Wednesday but signalled borrowing costs are unlikely to drop further in the near term as it awaits clarity on the direction of a job market showing signs of softening, inflation that "remains somewhat elevated" and an economy it sees picking up steam next year.
New policymaker projections issued after the U.S. central bank's final two-day meeting of 2025 showed a median expectation for a single quarter-percentage-point cut next year, the same as in September. But it was accompanied by a wide range of estimates that starkly illustrated the depth of disagreement about where to take monetary policy in 2026 and beyond in an economy being reshaped by President Donald Trump's policies and an artificial intelligence investment boom.
"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 rate-setting Federal Open Market Committee said in a policy statement that was tweaked to add language that in the past has been used to signal a pause in policy actions - an outlook at odds with market expectations still leaning toward two rate cuts in 2026.
Policymakers' refreshed estimates - hindered by incomplete data about the economy after a six-week government shutdown - also showed they expect inflation to slow to around 2.4% by the end of next year even as economic growth accelerates to an above-trend 2.3% and the unemployment rate remains at a moderate 4.4%, an outlook that should dispel worries about potential stagflation that have persisted this year.
The wide disagreement on the appropriate policy for such an environment also showed how challenging it could be to build a consensus in a policymaking body about to experience a leadership change, with Trump expected to nominate a successor to Fed Chair Jerome Powell within the next few weeks.
In a press conference after the meeting, Powell said: "I would note that having reduced our policy rate by 75 basis points since September and 175 basis points since last September, the fed funds rate is now within a broad range of estimates of its neutral value, and we are well positioned to wait to see how the economy evolves."
Powell, who repeatedly referenced being in a strong position to wait on the next move, added, though, that Fed officials have made no decision about what to do with rates at their next policy meeting in late January.
Major U.S. stock indices closed higher, while the dollar weakened against a basket of currencies and Treasury yields dropped."The 25-basis-point rate cut was widely expected and the economic projections remain optimistic. I would view this as a semi-dovish, cautious statement," said Peter Cardillo, chief market economist at Spartan Capital Securities. "The markets are applauding this decision."
Other analysts pointed to the wide range of policymaker views on the outlook for rates."It's definitely a hawkish cut, not so much in the fact that we had two dissenters that wanted to stand pat, but if you look at the 'dot plot,' there were six of them that penciled in no rate cut at this meeting," said Art Hogan, chief market strategist at B. Riley Wealth. The dot plot graphic of Fed policymaker rate-path projections showed six "dots" at 3.9%, where the policy rate was before the rate cut on Wednesday.
The decision to lower the benchmark policy rate by a quarter of a percentage point to the 3.50%-3.75% range drew three dissents, with Chicago Fed President Austan Goolsbee joining Kansas City Fed President Jeffrey Schmid in arguing the policy rate should be left unchanged, and Fed Governor Stephen Miran again advocating a larger half-percentage-point reduction.
