The Fed cut rates again but deep divisions cloud path ahead

Jerome Powell, chair of the Federal Reserve Board of Governors, speaks at a press conference at the Federal Reserve in Washington on July 30, 2025. The central bank is poised to lower interest rates on Wednesday even as a growing chorus of officials urge caution. (Caroline Gutman/The New York Times)

By COLBY SMITH

The Federal Reserve lowered interest rates by a quarter of a percentage point on Wednesday in a highly contentious decision. The split among policymakers suggested that the central bank may be done lowering borrowing costs for the time being unless there are clear signs that the labor market is weakening further.

The decision to cut for a third meeting in a row shifted interest rates to a new range of 3.5% to 3.75%. It marked the fourth straight vote that was not backed by all members of the 12-person Federal Open Market Committee, underscoring how fractured the central bank has become as it grapples with the risk of both rising unemployment and sticky inflation.

Stephen I. Miran, a member of the Board of Governors, opposed the decision in favor of a larger, half-point reduction. It is the third meeting in a row that Miran, who was tapped by President Donald Trump to join the Fed in September and is on a temporary leave of absence from the White House, has dissented.

Jeffrey R. Schmid, president of the Federal Reserve Bank of Kansas City, voted for the Fed to stand pat, as he did in October. He was joined this time by Austan D. Goolsbee, president of the Chicago Fed.

That degree of division is rare for Fed Chair Jerome Powell, who has previously been able to corral his colleagues to move as a largely cohesive group even while navigating tricky economic terrain. The split inside the Fed has only dialed up the pressure on Powell, who is simultaneously facing attacks from Trump and contenders seeking to replace him when his term as chair ends in May.

At a news conference after the decision, Powell said that divisions were only natural given the complicated environment the central bank is navigating. He said he could have made the case either way for the Fed to cut interest rates or pause reductions, describing it as a “close call.”

“You’ve got one tool,” he said. “You can’t do two things at once.”

New projections released Wednesday also highlighted the extent of the disagreement plaguing the Fed, which is composed of 12 regional presidents and seven members of the Board of Governors. The “dot plot,” a chart that aggregates what all 19 officials forecast will happen to borrowing costs over the coming years, showed that four other policymakers registered so-called soft dissents. They submitted a forecast for interest rates to have ended the year at the previous level of 3.75% to 4%, indicating their unofficial opposition to a cut.

By the end of 2026, most officials projected just one more quarter-point cut, in line with their forecasts the last time the dot plot was released three months ago. But officials were once again very divided. Seven of the 19 policymakers penciled in no reductions at all next year, while eight wanted at least two reductions. One official, likely to be Miran given his three dissents in favor of bigger cuts, penciled in interest rates falling closer to 2% over the course of next year.

In a further sign that the Fed is trying to keep open its options around interest rate decisions next year, the central bank amended its policy statement to say that it would assess the incoming economic data, evolving outlook and the balance of risks “in considering the extent and timing of additional adjustments.”

Powell on Wednesday made clear that no decision had been made about the central bank’s next vote at the end of January. He said that after three quarter-point reductions, interest rates were in the range of “neutral,” a level that the Fed has been seeking because it neither speeds up growth nor slows it down.

That meant the Fed was “well positioned to wait to see how the economy evolves,” he said. Powell also dismissed any suggested that the Fed may raise interest rates next year, saying that no policymaker supported that.

Shortly after Powell concluded his news conference, Trump expressed dismay that the Fed did not announce a deeper cut to interest rates on Wednesday, saying the central bank only reduced borrowing costs by a “rather small number that could have been doubled, at least doubled.”

“You can have tremendous growth without inflation,” Trump later said. “Everything goes up with the growth. But that’s not inflation. So I think we can do much better than traditional numbers.”

He later added that he was looking for a new chair who “will be honest with interest rates.”

“Our rates should be the lowest rates in the world,” Trump said.

The root of the disagreement inside the Fed stems from differing perspectives on whether to be more concerned about the prospects of inflation getting stuck above the central bank’s 2% target or the possibility that the labor market is on the cusp of cracking. What has made those judgment calls especially difficult is that officials have lacked access to crucial government data releases because of the shutdown that ended last month.

September’s jobs report was released only weeks ago and showed stronger monthly jobs growth but the unemployment rate rising to a four-year peak of 4.4%. That has occurred as price pressures have picked back up again, although the overall increase in inflation because of Trump’s tariffs has been less intense than first feared.

More clarity about the state of the economy may have helped to break the impasse between officials, but policymakers have had to make do without. The Bureau of Labor Statistics will release November’s jobs report next week as well as the consumer price index report for the month.