The Federal Reserve (Fed) cut interest rates for the third time this year as expected, but the internal divisions behind this policy adjustment were unprecedented. The Federal Open Market Committee (FOMC) voted 9-3 to cut rates by 0.25 percentage points, lowering the benchmark interest rate range to 3.5% to 3.75%. Although this was seen as a "hawkish rate cut," the Fed also signaled a highly cautious attitude towards further easing in the future, and market expectations for further rate cuts next year are rapidly cooling.
Three officials opposed the resolution, revealing a rift within the Fed.
The vote at this meeting marked the first time since September 2019 that three officials voted against the proposal, reflecting a high degree of disagreement on policy direction. Governor Stephen Miran, a "dovish" figure, supported a 0.5 percentage point rate cut, while staunch "hawks" Jeffrey Schmid, president of the Kansas City Fed, and Austan Goolsbee, president of the Chicago Fed, remained firmly in favor of keeping rates unchanged.
Miran, who will step down in January, voted "no" for the third time in a row, while Schmid opposed interest rate cuts for the second time in a row, further demonstrating that there are significant differences of opinion within the Fed on interest rate policy.
The statement's "following the schedule" wording reverts to 2024 rhetoric, implying a pause in interest rate cuts.
In its post-meeting statement, the Federal Reserve reiterated its December 2024 statement: "In considering whether to further adjust the target range for the federal funds rate, the Committee will carefully assess new data, the economic outlook, and the balance of risks." This wording was interpreted by the market at the time as a prelude to a pause in rate cuts, and indeed, rates were not lowered again until September 2025.
Chairman Powell pointed out at the press conference that this rate cut puts the Fed in a "good position" regarding interest rate policy, and it can now observe economic changes before deciding whether to adjust it.
US stocks rose while the bond market reacted mutedly, as the market digested expectations of a "final rate cut".
Following the interest rate decision, US stocks reacted positively, with the Dow Jones Industrial Average rising nearly 400 points. However, the bond market reacted mutedly, with long-term US Treasury yields remaining almost unchanged, indicating that market concerns about future policy direction persist.
The focus then shifted to the policy space beyond 2026. According to the latest released dot plot of interest rate projections, officials generally expect only one more rate cut in 2026 and only one adjustment in 2027, with the long-term interest rate target remaining around 3%. This aligns with the September forecast but further highlights internal divisions: seven officials do not believe a rate cut should be made in 2026, and four non-voting officials also expressed "soft opposition" to the decision.
Economic data: GDP forecast revised upwards, inflation still above target
Regarding the economic outlook, the FOMC raised its 2026 GDP growth forecast from 1.8% to 2.3%, indicating increased confidence in the economy's resilience. However, expectations for inflation remain pessimistic, projecting that it will not fall back to the Fed's 2% target until 2028.
According to the latest data in September, the Federal Reserve's preferred core inflation indicator still showed an annual growth rate of 2.8%, which is far lower than the peak of inflation, but still higher than the target range.
Unexpectedly, the Federal Reserve restarts bond purchases to address short-term funding pressures.
In addition to the interest rate adjustment, the Fed also announced that it will resume purchasing Treasury bonds this Friday, with the first round of purchases being $40 billion in short-term Treasury bonds. It is expected that the purchases will remain at a high level for several months before being gradually reduced.
This move echoes the "stop shrinking balance sheet" policy mentioned at the October meeting, mainly because the market is increasingly worried about the pressure on the overnight money market. The Fed's move is seen as an emergency measure to release liquidity and stabilize the money market.
With Powell's term nearing its end, markets are focused on who will succeed him as Fed chairman.
The Federal Reserve is currently in a sensitive period regarding policy and personnel. Powell has only three FOMC meetings left before the end of his second term, and President Trump has made it clear that he will use a "preference for low interest rates" as the criterion for appointing the new chairman.
Markets are widely betting that Kevin Hassett, director of the White House National Economic Council, will become the next Federal Reserve chairman, with the Kalshi platform showing a 72% chance of his nomination as of Wednesday morning. Other contenders, such as former governor Kevin Warsh and current governor Christopher Waller, are lagging far behind in support.
The government shutdown impacted decision-making, and the Fed proceeded with incomplete information.
It is worth noting that the Federal Reserve has made decisions in recent months with insufficient data. The US government shutdown previously resulted in delays or missing data for many key economic indicators, which were only gradually supplemented after the government restarted on November 12.
Although the Federal Reserve observes a phenomenon of "low hiring and low layoffs" in the labor market based on existing data, according to a report by Challenger, Gray & Christmas, U.S. companies have announced more than 1.1 million layoffs by November, casting a shadow over the job market in the coming months.
This article, titled "Federal Reserve Cuts Rates as Expected, Internal Disagreements Widen, Only One More Cut Expected in 2026," first appeared on ABMedia ABMedia .
