US Federal Reserve cuts interest rates again as labour market risks grow

A divided US Federal Reserve lowered interest rates for a third consecutive time this year, flagging labour market concerns even as inflation remains elevated and President Donald Trump’s tariffs bite.

But Fed chairman Jerome Powell signalled a higher bar for future reductions, saying the central bank is “well positioned to wait and see how the economy evolves from here”.

Powell said officials were in a good position to determine the “extent and timing of additional adjustments based on the incoming data, the evolving outlook and the balance of risks”.

Wednesday’s cut by a quarter of a percentage point brings rates to a range between 3.5% and 3.75%, the lowest in about three years – a move aligned with market expectations.

The Fed pencilled in one more rate cut next year and flagged heightened risks to employment as it announced its latest decision.

But a rift within the central bank deepened when three officials voted against the modest reduction.

Chicago Fed president Austan Goolsbee and Kansas City Fed president Jeffrey Schmid instead sought to keep rates unchanged. Fed governor Stephen Miran backed a bigger, half-percentage-point cut.

The Fed’s rate-setting committee consists of 12 voting members – including seven members of the board of governors, the New York Fed president and a rotation of reserve bank presidents – who take a majority vote in deciding the path of rates.

‘Close call’

Powell noted some disagreement was expected, pointing to tensions between inflation risks and a weakening jobs market.

“It’s a close call,” he said.

For now, he said, the Fed was “in the range of neutral” rates, with neutral being a level that neither stimulates nor restricts economic activity.

The Fed has previously described interest rates as “restrictive” – “neutral” could suggest less justification to lower levels quickly.

Powell said the US economy needed several years where wages were higher than inflation for “people to start feeling good about affordability”.

On Wednesday, Fed officials also lifted their 2026 GDP growth forecast to 2.3%, from 1.8% previously.

They eased their inflation expectations slightly for the next year and kept unemployment-rate expectations unchanged.

These projections could shift as the central bank grapples with a delay in federal economic data releases after a record-length government shutdown.

A contentious meeting that has multiple dissents was a “normal and healthy” sign, said Ryan Sweet, of Oxford Economics.

Still, “more cuts now imply fewer later”, he said in a note before the latest announcement.

“The central bank will want time to gauge how past cuts are impacting the economy,” Sweet said.

Turbulent 2026

This week’s gathering is the last before 2026, a year of key changes for the bank. A new chief will arrive after Powell’s term ends in May, while political pressure mounts.

Miran’s term expires in January, creating an opening among the Fed’s top leadership, and Trump has sought to free up another seat by attempting to fire Fed governor Lisa Cook.

Cook has challenged her ousting and the case remains before the courts – she continues to carry out her role in the meantime.

In a Politico interview published on Tuesday, Trump signalled he would judge Powell’s successor on whether they immediately cut rates.

Interviews for his choice are entering the final stages, with Trump’s chief economic adviser, Kevin Hassett, among the top contenders.

Others include former Fed official Kevin Warsh, Fed governors Christopher Waller and Michelle Bowman, and Rick Rieder, of BlackRock.

“The challenge facing the Fed next year is the potential jobless expansion when GDP increases, but employment gains are modest at best,” Sweet said.

“This leaves the economy vulnerable to shocks because the labour market is the main firewall against a recession,” he said.

- Agence France-Presse