By Nick Timiraos
Three officials dissented in opposite directions. Stalled progress on inflation and a cooling job market made for one of the most divided meetings in years.
Federal Reserve officials cut interest rates for a third straight meeting but signaled they might be done for now in the midst of unusual divisions over the path forward.
The decision Wednesday to reduce the benchmark federal-funds rate by a quarter-point—to between 3.5% and 3.75%, a three-year low—is aimed at protecting against a sharper than anticipated slowdown in hiring.
The Fed voted 9-3, the first time in six years that three officials cast dissents. Two officials thought the reduction wasn’t warranted, while another favored a larger, half-point cut.
With progress on inflation stalled, officials had indicated in the run-up to this week’s decision that further reductions could require evidence of labor-market deterioration. “We’re well-positioned to wait and see how the economy evolves from here,” said Fed Chair Jerome Powell at a news conference.
On Wednesday, their painstakingly calibrated postmeeting statement signaled a higher bar to additional cuts by echoing a similar pivot after cutting rates one year ago.
Still, Powell defended the decision to cut now rather than waiting until the Fed’s next meeting in late January, when it will have significantly more data that had been delayed because of this fall’s government shutdown.
He suggested that after adjusting for overcounting, job growth might have been slightly negative since April. “I think you can say that the labor market has continued to cool gradually, maybe just a touch more gradually, than we thought,” Powell said.
Wall Street cheered the rate cut, in part because Powell didn’t sound as opposed to additional rate cuts as some had feared before the meeting. The Dow Jones Industrial Average added about 1%, or 497 points, notching its best performance on a Fed-decision day since 2023. The S&P 500 rose 0.7%, and the Nasdaq Composite Index gained 0.3%.
The Fed no longer described the unemployment rate, which ticked up to 4.4% in September from 4.1% earlier this year, as having “remained low” in its statement.
Still, officials nudged up their growth estimates for next year, and Powell said he was hopeful that the Fed’s cuts would help support better hiring conditions.
Fed governor Stephen Miran dissented in favor of a larger reduction, while Chicago Fed President Austan Goolsbee joined Kansas City Fed President Jeff Schmid in opposing the cut.
Not every Fed official who participates in the meeting has a vote on the committee because reserve-bank presidents take turns voting. In new quarterly projections, six of 19 officials penciled in a year-end rate above the level before Wednesday’s cut—a sign that four more weren’t in favor of cutting.
The projections also showed a majority of officials penciled in no more than one reduction next year. That was the same as in September and suggests officials see little reason to accelerate the pace of easing.
Public comments from Fed officials in recent weeks revealed a committee so fractured that the decision likely came down to how Powell wanted to proceed.
His term as chair expires in May, meaning he will preside over just three more rate-setting meetings. President Trump has said he is close to naming a successor—raising questions about whether whoever follows will be able to command the same deference from colleagues.
Inflation-wary hawks see a central bank cutting into an economy that is stronger than it looks and worry that interest rates might no longer be high enough to put downward pressure on inflation. That is a bigger worry with each passing year, since inflation has been running above the Fed’s target since 2021.
By contrast, employment-focused doves see little evidence that lower rates are reviving sluggish housing and labor markets. With the latest reduction, the Fed will have cut rates by 1.75 percentage points in the past 15 months. They worry the risks are asymmetric: If unemployment accelerates, fixing it will require far more aggressive action than if inflation lingers near 3%.
Powell has sided with the doves since the jobs picture darkened in August, but the dissents and hawkish guidance underscored how he is navigating with the thinnest internal support of his tenure.
The combination of firm price pressures alongside a cooling labor market presents an unsavory trade-off for the Fed, one it hasn’t faced in decades. When officials confronted a similar dilemma, during the so-called stagflation of the 1970s, the central bank’s stop-and-go response allowed high inflation to become entrenched.
Powell played down committee disagreements as a natural consequence of those tensions between its mandates to promote low and stable inflation with a solid labor market. “When you do, this is what you see,” he said.
The fed-funds rate, which is what the Fed controls, influences short-term borrowing costs throughout the economy, including rates on credit cards and auto loans. Longer-term interest rates, which matter more for mortgages and business investment, have notched more modest declines since the Fed began to cut rates last year.
The 10-year Treasury yield, which dropped to 4.01% ahead of the Fed’s cut in September, closed at 4.163% on Wednesday. That has limited the relief for would-be home buyers and others hoping lower rates would ease borrowing costs.
Every decision to lower rates is becoming more contested as rates move closer to a so-called neutral setting that neither spurs nor slows economic activity. With each cut, “You’re just going to lose the support of a few more participants, and you’re going to need data to motivate those participants to want to join with the majority to get a cut,” said Jonathan Pingle, chief U.S. economist at UBS.
Powell justified the cuts that began in September as insurance against a weakening labor market—a sequence he first telegraphed in his Jackson Hole address in August. It can take time for those reductions to influence economic conditions. The challenge now is signaling that phase is complete without ruling out further action if the job market cracks.
The Labor Department is set to release employment data for October and November next week, and Fed officials will have December job readings before their next meeting in late January. The coming data deluge complicates any effort to signal intentions strongly.
A rise in jobless claims, evidence of rising layoffs and a steady grind higher in the unemployment rate would be a “very uncomfortable constellation of events for the core of the committee,” Pingle said. “They’re not planning on a January cut, but I don’t think this chair, at this juncture, is able to rule anything out.”
Data that shows whether more-troubling scenarios for inflation are materializing will also be important. The Labor Department is set to report the November consumer-price index next week.
Nathan Sheets, global chief economist at Citi, said he is watching January price data to see if businesses that have held back tariff-related cost increases reset prices higher at the start of the year. Sheets is among those who worry the Fed has little margin for error on inflation.
“I don’t think inflation is going to break out on the upside, but by the same token, you’re not at 2% and there’s no compelling narrative that you’re going to get back to 2% anytime soon,” he said. “And that definitely gives me pause.”
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