The US Federal Reserve has lowered interest rates for the third consecutive time this year, reducing them by a quarter percentage point to a range of 3.50% to 3.75%. This move, announced on Wednesday, brings rates to their lowest level in approximately three years, aligning with market expectations. However, the central bank signaled that it may hold off on further reductions in the coming months, citing a need to assess the evolving economic outlook.
Fed Chair Jerome Powell stated that the bank is “well positioned to wait and see how the economy evolves from here,” emphasizing the importance of monitoring incoming data and the balance of risks. The decision was not unanimous, with three officials voting against the rate cut, highlighting a rift within the central bank. Chicago Fed President Austan Goolsbee and Kansas City Fed President Jeffrey Schmid supported keeping rates unchanged, while Fed Governor Stephen Miran advocated for a more significant half-percentage-point cut.
The Fed’s rate-setting committee, comprising 12 voting members, has penciled in one more rate cut for next year, despite flagging heightened risks to employment. The central bank also lifted its 2026 growth forecast, eased inflation expectations, and maintained its unemployment rate projection. These forecasts may be subject to change due to the delay in federal economic data releases following a record-long government shutdown.
The decision comes as the US economy navigates a complex landscape, with inflation above the Fed’s target and a softening job market. Powell acknowledged the challenges, noting that it’s a “close call” and that the bank is “in the high end of the range of neutral” rates. The Fed has previously described interest rates as “modestly restrictive,” but the shift towards a “neutral” stance may suggest less urgency to lower rates quickly.
As the year draws to a close, the Fed is preparing for significant changes in 2026, including the arrival of a new chief after Powell’s term ends in May. The selection process for Powell’s successor is underway, with Trump’s chief economic adviser, Kevin Hassett, among the top contenders. The appointment is expected to have a significant impact on the bank’s policy deliberations, potentially leading to a more divided committee.
The Fed’s decision to pause on further rate cuts may provide an opportunity for the economy to respond to previous reductions. Economist Ryan Sweet of Oxford Economics noted that the Fed will likely want to pause for a while, allowing time for the effects of previous cuts to materialize. As the central bank navigates the complexities of the US economy, its decisions will be closely watched, with significant implications for economic growth, employment, and inflation.