Divided US Fed makes third rate cut in 2025, sees just one reduction in 2026

WASHINGTON – A divided US Federal Reserve lowered interest rates on Dec 10 for a third consecutive time in 2025, flagging labour market concerns even as inflation remained elevated as President Donald Trump’s tariffs bite.

But the Fed pencilled in just one more rate cut in 2026 as chairman Jerome Powell signalled a higher bar for future reductions.

Mr Powell told a press briefing that officials are in a good position to determine the “extent and timing of additional adjustments based on the incoming data, the evolving outlook and the balance of risks”.

The Dec 10 cut by a quarter percentage point brings rates to a range between 3.5 per cent and 3.75 per cent, the lowest in around three years, a move aligned with market expectations.

But a rift within the central bank deepened with three officials voting against the modest reduction.

Chicago Fed president Austan Goolsbee and Kansas City Fed president Jeffrey Schmid instead sought to keep rates unchanged.

Fed governor Stephen Miran backed a bigger, half-percentage-point cut.

The Fed’s rate-setting committee consists of 12 voting members – including seven members of the board of governors, the New York Fed president and a rotation of reserve bank presidents – who take a majority vote in deciding the path of rates.

‘Close call’

Mr Powell noted that some disagreement was expected, pointing to tensions between inflation risks and a weakening jobs market.

“It’s a close call,” he said.

The most recent official data on unemployment and inflation is for September, and showed the US unemployment rate rising to 4.4 per cent from 4.3 per cent, while the Fed’s preferred measure of inflation also increased slightly to 2.8 per cent from 2.7 per cent.

The Fed has a 2 per cent inflation target, but the pace of price increases has risen steadily from 2.3 per cent in April, a fact at least partly attributable to the pass-through of higher US tariffs to consumers and a driving force behind the central bank’s policy divide.

Job and inflation data for November will be released next week, followed later by a detailed report of economic growth for the third quarter.

For now, Mr Powell said the Fed is “in the range of neutral” rates, with neutral being a level that neither stimulates nor restricts economic activity.

The Fed has previously described interest rates as “restrictive” – “neutral” could suggest less justification to lower levels quickly.

Job and inflation data for November will be released next week, followed later by a detailed report of economic growth for the third quarter.

Mr Powell added that the US economy needs several years where wages are higher than inflation for “people to start feeling good about affordability.”

Fed policymakers’ refreshed estimates also showed they expect inflation to slow to around 2.4 per cent by the end of 2026 even as economic growth accelerates to an above-trend 2.3 per cent and the unemployment rate remains at a moderate 4.4 per cent, an outlook that should dispel worries about potential stagflation that have persisted in 2025.

These projections could shift as the central bank grapples with a delay in federal economic data releases after a record-long government shutdown.

A contentious meeting that has multiple dissents is a “normal and healthy” sign, said Mr Ryan Sweet of Oxford Economics.

Still, “more cuts now imply fewer later”, he added in a note before the latest announcement.

“The central bank will want time to gauge how past cuts are impacting the economy,” he said.

Turbulent 2026

This week’s gathering is the last before 2026, a year of key changes for the bank. A new chief will arrive after Mr Powell’s term ends in May, while political pressure mounts.

Dr Miran’s term expires in January, creating an opening among the Fed’s top leadership, and Mr Trump has sought to free up another seat by attempting to fire Fed governor Lisa Cook.

Dr Cook has challenged her ousting and the case remains before the courts – she continues to carry out her role in the meantime.

In a Politico interview published on Dec 9, Mr Trump signalled he would judge Mr Powell’s successor on whether they immediately cut rates.

Interviews for his choice are entering the final stages, with Mr Trump’s chief economic adviser, Mr Kevin Hassett, among top contenders.

Others include former Fed official Kevin Warsh, Fed governors Christopher Waller and Michelle Bowman, and Mr Rick Rieder of BlackRock.

“The challenge facing the Fed next year is the potential jobless expansion, when GDP (gross domestic product) increases but employment gains are modest, at best,” Mr Sweet said.

“This leaves the economy vulnerable to shocks because the labour market is the main firewall against a recession,” he said. AFP, REUTERS