Fed cuts rate but future easing uncertain

The US Federal Reserve cut interest rates for the third time this year, even as internal divisions create uncertainty about additional cuts in the coming months.

The central bank said on Wednesday it was cutting its key lending rate target by 0.25 percentage points, placing it in a range of 3.50% to 3.75%, the lowest level in three years.

But policymakers disagree on how the Fed should balance competing priorities: a weakening labor market on the one hand and rising prices on the other.

The Fed's economic forecasts released Wednesday suggest there will be one rate cut next year, although new data could change that.

Fed Chairman Jerome Powell said central banks need time to see how the Fed's three rate cuts this year will affect the US economy. Policymakers will carefully study the incoming data ahead of the Fed's next meeting in January, he added.

“We have a good opportunity to wait and see how the economy develops,” Powell told reporters.

Those hoping for further interest rate cuts, including President Donald Trump, may have to wait.

The Fed faces “a very difficult situation” as it faces risks of rising inflation and unemployment, Powell said, adding: “You can't do two things at once.”

The decision to cut rates on Wednesday was not unanimous, indicating growing divisions among central bankers over the outlook for the U.S. economy.

Three Fed officials broke ranks and issued formal dissent.

Stephen Mearan, who is on leave from his post as head of Trump's Council of Economic Advisers, voted for a larger cut of 0.5 percentage point.

Austan Goolsbee, president of the Chicago Federal Reserve Bank, and Jeffrey Schmid, president of the Kansas City Federal Reserve Bank, voted to keep rates steady.

Trump, who has repeatedly called on Powell to cut rates, said after Wednesday's meeting that the Fed's rate cut could be “at least in half.”

“Our rates need to be much lower,” he said at a White House roundtable. “We should have the lowest rates in the world.”

The data blackout during the longest U.S. government shutdown in history, which ended in November, left policymakers partially in the dark about the state of the economy. But concerns about a slowing labor market continue to outweigh inflation concerns, at least for now.

The unemployment rate rose from 4.3% to 4.4% in September, Labor Department data shows. deferred report released last month. Lower interest rates are aimed at stimulating the labor market by reducing the cost of borrowing for businesses.

Inflation remains above the Fed's 2% target. In September for the first time it reached 3% since January.

But while tariffs appear to be pushing up some consumer prices, recent milder-than-expected inflation figures have allowed the Fed to focus on stimulating the labor market by cutting rates, analysts say.

Colleen McHugh, an adviser at investment platform Wealthify, said above-target inflation has made it harder for the Fed to cut rates, but the job market appears to be pushing them in that direction.

She expects one or two more rate cuts next year.

“I think the conundrum in the states at the moment is that there is a lot of political pressure on the Fed chairman and his committee to cut rates,” she told the BBC's Today programme.

Policymakers remain divided over the path forward for interest rates.

Asked about differences among policymakers, Powell acknowledged that it was “unusual” to have “persistent tension” between the Fed's two mandates to keep prices stable and unemployment low.

“And when you do, that's what you'll see,” he said, referring to the growing divisions.

But Powell characterized the internal debate among Fed officials as thoughtful and respectful.

“We come together and get to a place where we can make a decision,” he said.

Central banks will have a little more clarity next week, with the expected release of official labor market and inflation data for November.

The incoming data could change policymakers' views, potentially bolstering calls for further policy easing next year if there are further signs that the labor market is stalling.

Trump's search to replace Powell as Fed chairman once his term expires next May is adding to uncertainty about the future course of Fed policy.

Trump could announce his choice in the next few weeks.

Kevin Hassett, a longtime conservative economist and key economic adviser to Trump, is considered the favorite to succeed Powell.

A Trump supporter, Hassett served as chairman of the White House Council of Economic Advisers during Trump's first term and now chairs the National Economic Council.

He has been a staunch defender of Trump's economic policies, downplaying data showing signs of weakness in the U.S. economy, amplifying accusations of bias at the Bureau of Labor Statistics and supporting Trump's handling of the Fed.

Hassett's dedication to the president has raised questions among analysts about whether he will act independently.

Other names that have been floated for Fed chairman include economist Kevin Warsh, current Fed Governor Christopher Waller and even Treasury Secretary Scott Bessent.

Trump is “still making up his mind and looking for someone to follow his way of thinking,” Thomas Hoenig, a distinguished senior fellow at the Mercatus Center, told the BBC.

Applicants, he added, “must assume they will be independent, otherwise the markets will get very nervous – and that will create a lot of volatility.”

Asked Wednesday whether Trump's search for a new Fed chairman was interfering with his work or changing his thinking, Powell responded with a resounding “no.”