Fed approves third rate cut this year, signals slower path ahead

The Federal Reserve cut interest rates on Wednesday for the third time this year, but signaled that further reductions will come more slowly. The decision highlighted sharp divisions inside the central bank as policymakers debate how to guide the economy.

The Federal Open Market Committee lowered the federal funds rate by 0.25 percentage point to a range of 3.5% to 3.75%. The vote was 9-3, the highest number of dissents since 2019.

Governor Stephen Miran backed a larger half-point cut. Kansas City Fed President Jeffrey Schmid and Chicago Fed President Austan Goolsbee voted to keep rates unchanged.

Fed Chair Jerome Powell said the central bank is now “well positioned to wait and see how the economy evolves.” He added that policymakers have made no decision about a move at the January meeting.

Markets reacted positively. The Dow Jones Industrial Average rose about 500 points, while Treasury yields moved lower.

The Fed’s updated projections showed one cut in 2026 and one cut in 2027, with no change from forecasts released in September. However, officials were divided: seven indicated they see no cuts next year.

The committee raised its outlook for 2026 GDP growth to 2.3%. Inflation is still expected to stay above the Fed’s 2% target until 2028. The most recent reading of the Fed’s preferred inflation measure was 2.8% in September.

The Fed also said it will resume buying Treasury securities, beginning with $40 billion in Treasury bills on Friday. Purchases are expected to stay elevated for several months before being reduced.

Powell faces a sensitive period as he nears the end of his term. President Donald Trump is expected to name a new Fed chair soon. Betting markets currently see Kevin Hassett as the leading candidate.

Fed officials have been working with limited data following a six-week government shutdown that ended in mid-November. Available indicators show a slow labor market, while private data suggests layoffs may increase, with more than 1.1 million job cuts announced through November.