Divided Fed Lowers Rates, Signals Pause and One 2026 Cut as Growth Rebounds

• The U.S. Federal Reserve cut interest rates on Wednesday in another divided vote but signaled it will likely pause further reductions in borrowing costs as officials look for clearer signals about the direction of the job market and inflation that "remains somewhat elevated."
• New projections issued after the U.S. central bank's two-day meeting showed the median policymaker sees just one quarter-percentage-point cut in 2026, the same outlook as in September, with inflation expected to slow to around 2.4% by the end of next year even as economic growth accelerates to an above-trend of 2.3% and the unemployment rate remains at a moderate 4.4%.
• "In considering the extent and timing of additional adjustments to the target range for the federal funds rates, the Committee will carefully assess incoming data," the rate-setting Federal Open Market Committee said in language that in the past has been used to signal a pause in policy actions - an outlook at odds with market expectations, which remained locked into two rate cuts next year even after the Fed issued its statement.
• "It's definitely a hawkish cut, not so much in the fact that we had two dissenters that wanted to stand pat, but if you look at the dot plot, there were six of them that penciled in no rate cut at this meeting," said Art Hogan, chief market strategist at B Riley Wealth. The dot plot graphic of Fed policymaker rate-path projections showed six "dots" at 3.9%, where the policy rate was before Wednesday's rate cut.
• The decision to lower the benchmark policy rate by a quarter of a percentage point to the 3.50%-3.75% range drew three dissents, with Chicago Fed President Austan Goolsbee joining Kansas City Fed President Jeffrey Schmid in arguing the policy rate should be left unchanged, and Fed Governor Stephen Miran again advocating a larger half-percentage-point reduction.
• How monetary policy evolves from here, heading into a midterm U.S. election year that could revolve around the performance of the economy and with President Donald Trump urging sharper reductions, will now hinge on data that is still lagging from the impact of the 43-day federal government shutdown in October and November.
• The projections are in a sense optimistic. Interest rates may remain higher than anticipated, but the economy is seen growing faster even as inflation falls and the jobless rate also eases lower. However, the latest policy statement and projections were crafted without the benefit of recent job and inflation reports, and instead relied on "available indicators," which Fed officials have said include their own internal surveys, community contacts and private data.

(Source: Reuters)