The U.S. Federal Reserve lowered its benchmark interest rate by 25 basis points on Wednesday, setting the federal funds target range to 3.50%–3.75%. The move matched widespread expectations and marked the central bank’s third reduction of the year. Yet, the accompanying message pointed to caution and internal divisions about the road ahead.
Fed delivers a “hawkish cut” amid internal split
The decision reflected a rare split within the Federal Open Market Committee (FOMC). The 9-3 vote included dissents from both hawkish and dovish members. Governor Stephen Miran favored a steeper half-point reduction, while Kansas City Fed President Jeffrey Schmid and Chicago Fed President Austan Goolsbee preferred leaving rates unchanged.
This mix of opposing dissents had not appeared since 2019. Analysts described it as another sign of the Fed’s struggle to reconcile moderating inflation with a labor market showing mild signs of stress.
The new statement retained the same cautionary language from earlier meetings:
“In considering the extent and timing of additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks.” FOMC statement said.
When similar language appeared in 2024, it signaled a likely pause. Markets interpreted today’s phrasing as evidence that the Fed is not committing to more cuts soon.
Powell says Fed is “well positioned to wait and see”
At the post-meeting press conference, Fed Chair Jerome Powell sought to temper expectations for rapid policy easing.
“We are well positioned to wait and see how the economy evolves,” Powell said, as reported by CNBC.
He later added,
“It’s so happened that we’ve cut three times. We haven’t made any decision about January, but as I said, we think we’re well positioned to wait and see how the economy performs.”
Powell characterized the current rate range as near the top of what policymakers view as “neutral.” That term describes a level of interest rates that neither stimulates nor restricts the economy.
Major U.S. stock indexes rose after the announcement, with the Dow Jones Industrial Average gaining about 500 points. Treasury yields moved lower as investors read the cut as moderate, rather than aggressive.
Economic projections remain steady for 2026
The Fed’s updated projections hold steady compared to the September update. Policymakers foresee one additional rate cut in 2026 and another in 2027 before settling near a longer-run target of 3%. The committee expects GDP growth of 2.3% in 2026, unemployment at 4.4%, and PCE inflation near 2.4%.
While inflation remains above the 2% goal, it has cooled substantially from its earlier highs. The Fed’s preferred measure recorded 2.8% annual inflation in September, based on the latest available data.
Policymakers raised their forecast for next year’s economic growth and continued to expect inflation to meet the target only in 2028.
Fed resumes limited Treasury purchases
Alongside the rate decision, the central bank announced it will start buying Treasury securities again. The Fed plans to purchase about $40 billion in Treasury bills beginning Friday, following up on its decision to halt balance sheet runoff.
The statement described the purchases as temporary and aimed at ensuring smooth financial conditions. Officials expect to keep purchases “elevated for a few months” and then “significantly reduced.”
Market observers viewed this step as a liquidity management measure rather than a new round of quantitative easing.
Political backdrop and leadership transition
The decision came as Powell nears the end of his chairmanship. Former President Donald Trump is expected to nominate a new chair soon. Betting markets show Kevin Hassett, director of the National Economic Council, as the frontrunner, with 72% odds of selection. Former Fed Governor Kevin Warsh and current Governor Christopher Waller lag behind in projections.
Powell emphasized that debate within the FOMC remains constructive despite the unusual split.
“The discussions we have are as good as any we’ve had in my 14 years at the Fed, very thoughtful, respectful, and you just have people who have strong views, and we come together and we reach a place where we can make a decision,” he said.
Data uncertainty and implications
Economic analysis since September has been hindered by a recent six-week government shutdown, which delayed official statistics. Fed officials relied on partial employment and inflation data in crafting their decision. Unofficial indicators suggest employers have maintained a cautious approach to hiring and layoffs.
Markets are now focused on the Fed’s January 2026 meeting as the next key pivot point. Without a firm commitment to further cuts, policymakers appear determined to keep decisions data-driven.
Wednesday’s move confirmed expectations but left investors without clear forward guidance. The result was a “hawkish cut” — one that eases policy now while keeping the door open for a pause if inflation stabilizes or strengthens.
Tanya Petrusenko
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