The Federal Reserve has lowered its policy rate by 25 basis points, delivering its third reduction of the year and confirming what markets had largely anticipated for weeks.
The cut takes the federal funds target range down to the 3.50%–3.75% range but the lead-up to its latest meeting has been notable for a split among members, between those who favor cuts to counter weakness in the labor market and those who think easing threatens aggravating inflation. This meeting's vote, however, was not as close as expected with nine for and three against - Stephen I. Miran, who wanted a 50 basis points cut, and Austan D. Goolsbee and Jeffrey R. Schmid, who preferred no change.
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The Fed’s statement, while not as hawkish as feared, suggested a reluctance to rush into further easing: "Available indicators suggest that economic activity has been expanding at a moderate pace. Job gains have slowed this year, and the unemployment rate has edged up through September. More recent indicators are consistent with these developments. Inflation has moved up since earlier in the year and remains somewhat elevated.
"The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. Uncertainty about the economic outlook remains elevated. The Committee is attentive to the risks to both sides of its dual mandate and judges that downside risks to employment rose in recent months."
PIMCO economist Tiffany Wilding said the Fed committee now clearly views policy as within the range of neutral estimates, which is expected to promote growth and a normalizing of inflation after tariffs contributed to a onetime adjustment across various consumer goods categories.
Wilding said: "The Fed faces a delicate balancing act: curb inflation while supporting the labor market so that households feel economically secure. Powell warned there is no risk-free path. She added that Chair Jay Powell's press conference may have set the stage for the Fed to remain on hold for the duration of his tenure in 2026. "However, if the better growth that is expected in early 2026 fails to stabilize the increasingly soft US labor market, the Fed is well positioned to cut rates. And even if downside risks are avoided, the Fed is still likely to be able to eventually resume gradual rate cuts under a new chair as inflationary pressures ease in late 2026."
Before the announcement, Sam Williamson, senior economist at First American, said a continuing softness in the jobs market would force the Fed’s hand again.
“Market expectations for a December rate cut initially retreated after Powell said it was ‘far from guaranteed’ and meeting minutes showed officials leaning toward holding steady,” Williamson said. “However, since then, rising unemployment and softer signals from policymakers have revived bets on a quarter-point cut.”
Williamson said he expected the Fed's messaging, along with the cut and potential dissents, will signal to the market that it will enter 2026 with caution.
However, Powell's expected replacement, Kevin Hassett, who markets believe to be President Trump first choice as the next chair, is expected to keep the pressure on for significantly more cuts in 2026. Asked at the Wall Street Journal CEO Council Summit Tuesday if he would push for substantially lower rates, he said: "If the data suggests that we could do it, then — like right now — I think there’s plenty of room to do it." Pressed on whether that meant more than 25 basis points, he replied: "Correct.”
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