US Federal Reserve cuts key rate again, signals steadier economy next year

The Federal Reserve reduced its key interest rate by a quarter-point for the third time in a row on Wednesday but signalled that it may leave rates unchanged in the coming months.

Chair Jerome Powell signalled at a news conference that the Fed would likely hold off on further rate cuts in the coming months while it evaluated the health of the economy. And in a set of quarterly economic projections, Fed officials signalled they expect to lower rates just once next year.

Wednesday's cut reduced the rate to about 3.6 per cent, the lowest it has been in nearly three years. Lower rates from the Fed can bring down borrowing costs for mortgages, auto loans, and credit cards over time, though market forces can also affect those rates.

Fed officials "will carefully evaluate the incoming data," Powell said, adding that the Fed is "well positioned to wait to see how the economy evolves." The chair also said that the Fed's key rate was close to a level that neither restricts nor stimulates the economy.

Three Fed officials dissented from the move, the most dissents in six years and a sign of deep divisions on a committee that traditionally works by consensus. Two officials voted to keep the Fed's rate unchanged, while Stephen Miran, whom Trump appointed in September, voted for a half point cut.

December's meeting could usher in a more contentious period for the Fed. Officials are split between those who support reducing rates to bolster hiring and those who would prefer to keep rates unchanged because inflation remains above the central bank's 2 per cent target. Unless inflation shows clear signs of coming fully under control, or unemployment worsens, those divisions will likely remain.

"What you see is some people feel we should stop here and we're in the right place and should wait, and some people think we should cut more next year," Powell said. He did rule out a rate hike next year.

Trump on Wednesday criticised the cut as too small, and said he would have preferred "at least double." The president could name a new Fed chair as soon as later this month to replace Powell when his term ends in May. Trump's new chair is likely to push for sharper rate cuts than many officials may support.

Stocks jumped in response to the Fed's move, in part because some Wall Street investors expected Powell to be more forceful in shutting down the possibility of future cuts. The broad S&P 500 stock index rose 0.7 per cent and closed near an all-time high reached in October.

Powell was also optimistic about the economy's growth next year, and said that consumer spending remains resilient while companies are still investing in artificial intelligence infrastructure. He also suggested growing worker efficiency could boost growth as well.

A stark sign of the Fed's divisions was the wide range of cuts that the 19 members of the Fed's rate-setting committee pencilled in for 2026. Seven projected no cuts next year, while eight forecast that the central bank would implement two or more reductions. Four supported just one. Only 12 out of 19 members vote on rate decisions.

The Fed met against the backdrop of elevated inflation that has frustrated many Americans, with prices higher for groceries, rents, and utilities. Consumer prices have jumped 25 per cent in the five years since COVID.

"We hear loud and clear how people are experiencing really high costs," Powell said Wednesday. "A lot of that isn't the current rate of inflation, a lot of that is imbedded high costs due to higher inflations in 2022-2023.