The Federal Reserve’s divergence regarding its priorities led to a reduction in its key interest rate on Wednesday, yet it indicated that the path to additional cuts may be more challenging moving forward. The central bank’s Federal Open Market Committee, meeting the expectations of a “hawkish cut,” has reduced its key overnight borrowing rate by a quarter percentage point, establishing a new range of 3.5%-3.75%. Nonetheless, the decision raised cautionary signals regarding the future trajectory of policy and included dissenting votes from three members, a scenario not witnessed since September 2019. The 9-3 vote once more showcased a division between hawkish and dovish perspectives – Governor Stephen Miran advocated for a more pronounced half-point reduction, while regional Presidents Jeffrey Schmid of Kansas City and Austan Goolsbee of Chicago supported maintaining the current stance. In the terminology of the Federal Reserve, hawks typically exhibit a greater concern for inflation and advocate for elevated interest rates, whereas doves prioritize the labor market and prefer reduced rates. This marks the third consecutive “no” vote from Miran, who is set to depart the Fed in January, and the second consecutive dissent from Schmid. The prior three-dissent meeting exhibited a 2-1 split among members torn between the necessity for a more restrictive versus a more accommodative monetary policy.

The post-meeting rate statement utilized language previously employed in the FOMC meeting from a year prior. The statement indicated that “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 evolving outlook, and the balance of risks.” In December 2024, the language employed indicated that the committee had likely concluded its cutting measures for the foreseeable future. The FOMC subsequently refrained from sanctioning any reductions until the meeting in September 2025. Fed Chair Jerome Powell, during his post-meeting news conference, indicated that the reduction places the Fed in a favorable position regarding interest rates. “We are well positioned to wait and see how the economy evolves,” Powell stated. Equities experienced an uptick in response to the announcement, as the Dow Jones Industrial Average increased by 500 points. Treasury yields experienced a general decline. “We’re in the high end of the range of neutral,” Powell stated. “It has occurred that we have implemented three cuts. We have not made any decision regarding January; however, as previously stated, we believe we are well positioned to observe the performance of the economy.” Following the third consecutive cut, attention shifts to the future direction of the FOMC. The closely monitored “dot plot” reflecting the individual expectations of officials regarding interest rates suggested a solitary reduction in 2026, followed by another in 2027, prior to the federal funds rate approaching a long-term target of approximately 3%. The projections remained consistent with the September update; however, the chart illustrated the differing opinions within the committee regarding the future trajectory of interest rates. In addition to the two “no” dovish votes regarding the rate cut, four other nonvoting participants in the meeting expressed “soft dissents,” signaling their disagreement with the decision. Seven officials have also expressed their preference for no cuts in the upcoming year.

The FOMC meetings consist of 19 participants, including governors and regional presidents, with 12 holding voting rights. “The discussions we have are as good as any we’ve had in my 14 years at the Fed, very thoughtful, respectful, and you just have people who have strong views, and we come together and we reach a place where we can make a decision,” Powell stated. The committee has revised its outlook for gross domestic product growth in 2026, increasing its September estimate by half a percentage point to 2.3%. The committee maintains its forecast that inflation will remain above the 2% target until 2028. Regarding inflation, prices continue to exhibit persistent elevation, with the Federal Reserve’s favored measure indicating an annual rate of 2.8% in September, the latest month for which data has been released. Although this figure is significantly lower than the highs observed a few years prior, it remains substantially above the central bank’s 2% target. Alongside the rate decision, the Fed revealed its intention to recommence purchasing Treasury securities, building on the announcement made during the October meeting regarding the cessation of its balance sheet runoff this month. The decision arises in the context of apprehensions regarding strains in overnight funding markets. The central bank will initiate its operations by purchasing $40 billion in Treasury bills, commencing on Friday. Subsequently, purchases are anticipated to “remain elevated for a few months” before they are likely to be “significantly reduced.” The actions occur during a critical juncture for the Federal Reserve. In his pursuit of consensus among policymakers, Powell approaches the conclusion of his second term as chair. He has only three meetings remaining before he yields to the nominee selected by President Donald Trump. Trump has indicated that he will evaluate his selection based on a preference for lower rates, rather than prioritizing a candidate dedicated to the Fed’s dual mandate of maintaining stable prices and achieving full employment.

The president informed reporters on Tuesday evening that he anticipates making a decision in the near future. Prediction markets indicate that the nominee is likely to be National Economic Council Director Kevin Hassett, who is perceived by certain segments of the financial markets as a Federal Reserve chair inclined to align with Trump’s agenda. As of Wednesday morning, Kalshi assigned a probability of 72% to Hassett receiving the appointment, while former Fed Governor Kevin Warsh and current Governor Christopher Waller lagged significantly behind. Federal Reserve officials have been compelled to navigate a landscape in which a significant portion of the official data utilized for decision-making has either been arriving significantly delayed or is entirely absent, a consequence of the government shutdown that persisted for approximately six weeks, concluding on November 12. The data observed suggests a labor market characterized by low hiring and low firing, with employers showing hesitance to expand payrolls or to implement significant layoffs. Recent indications from unofficial data suggest that more significant job reductions are on the horizon, with announced layoffs projected to exceed 1.1 million through November, as reported.