Federal Reserve Cuts Key Interest Rate Again
But Fed Signals Higher Bar for Future Reductions, Forecasts Only 1 Rate Cut in 2026
Key Takeaways:
- The Federal Reserve cut its key rate by a quarter-point to about 3.6% on Dec. 10.
- Officials projected only one cut next year and showed deep divisions amid elevated inflation, slowing job gains and limited data after the government shutdown.
- The Fed’s January meeting will weigh backlogged economic reports, while President Donald Trump prepares to name a new chair who could push for sharper cuts.
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The Federal Reserve reduced its key interest rate for the third time in a row Dec. 10 but signaled that it may leave rates unchanged in the coming months, a move that could attract ire from President Donald Trump, who has demanded steep reductions to borrowing costs.
In a statement released after a two-day meeting, the Fed’s rate-setting committee signaled that it may keep its rate unchanged in the coming months. And in a set of quarterly economic projections, Fed officials signaled they expect to lower rates just once next year.
The cut reduced the rate by a quarter-point to about 3.6%, the lowest it has been in nearly three years. Lower rates from the Fed can bring down borrowing costs for mortgages, auto loans and credit cards over time, though market forces can also affect those rates.
Three Fed officials dissented from the move, the most dissents in six years and a sign of deep divisions on a committee that traditionally works by consensus. Two officials voted to keep the Fed's rate unchanged, while Stephen Miran, whom Trump appointed in September, voted for a half-point cut.
December’s meeting could usher in a more contentious period for the Fed. Officials aresplitbetween those who support reducing rates to bolster hiring and those who’d prefer to keep rates unchanged because inflation remains above the central bank’s 2% target. Unless inflation shows clear signs of coming fully under control, or unemployment worsens, those divisions will likely remain.
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And Trump could name a new Fed chair as soon aslater this monthto replace Jerome Powell when his term ends in May. Trump’s new chair is likely to push for sharper rate cuts than many officials may support.
A stark sign of the Fed’s divisions was the wide range of cuts that the 19 members of the Fed’s rate-setting committee penciled in for 2026. Seven projected no cuts next year. while eight forecast that the central bank would implement two or more reductions. Four supported just one. Only 12 out of 19 members vote on rate decisions.
The Fed met against the backdrop of elevated inflation that hasfrustratedmany Americans, with prices higher for groceries, rent and utilities. Powell has previously acknowledged those frustrations and said they reflect the sharp overall price increases in the five years since COVID. Consumer prices have jumped 25% in that time.
In a delayed report last week, the government said the Fed’s preferred inflation gauge remained high in September, with bothoverall and core prices rising 2.8%from a year earlier. That is far below the spikes in inflation three years ago but still painful for many households after the big run-up since 2020.
The Fed typically keeps its key rate elevated to combat inflation, while it often reduces borrowing costs when unemployment worsens to spur more spending and hiring.
Adding to the Fed's challenges, job gains have slowed sharply this year, and the unemployment rate has risen forthree straight monthsto 4.4%. While that is still a low rate historically, it is the highest in four years. Layoffs are also muted, so far, as part of what many economists call a“low hire, low fire”job market.
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The lack of economic data since the government shutdown ended Nov. 13 hascontributedto the divisions at the Fed. But when Fed officials next meets in late January, they’ll have up to three months of backlogged reports to consider. If those figures show that the job market has worsened, the Fed could reduce rates again in January.
By contrast, if hiring has stabilized while inflation remains elevated, they may hold off on additional cuts for several months.
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In an interview with Politico published Dec. 9, Trump said “yes” when asked if reducing rates “immediately” was a litmus test for a new Fed chair. Trump has hinted that he will likely pick Kevin Hassett, his top economic adviser.
Hassett has often called for lower borrowing costs, but this week has been more circumspect. In an interview Dec. 9 on CNBC, when asked how many more rate cuts he would support, Hassett did not give a specific answer and said, “What you need to do is watch the data.”
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