Federal Reserve cuts interest rates by 25 basis points and signals pause

Central bank projects one interest rate cut in 2026 amid growing divisions over future moves

Fed Chair Jerome Powell suggested the central bank could have a higher threshold for rate cuts after its latest move. AFP

A divided US Federal Reserve cut interest rates by 25 basis points for a third consecutive meeting on Wednesday, while signalling it could pause future moves and just one rate cut in 2026.

Central banks across the GCC were expected to follow the Fed's decision – which lowered the target range for the federal funds rate to 3.5 to 3.75 per cent – because of their currency pegs, with Kuwait being the only exception.

Describing the move as a “close call”, Fed Chair Jerome Powell suggested the central bank is now in a position to return to a wait-and-see posture.

“We're well positioned to wait and see how the economy evolves from here,” he said during a news conference.

The Fed also maintained its future rate-cut forecast, according to its quarterly economic projections, expecting its target rate to fall to 3.4 per cent by the end of 2026, in line with its September forecast.

“This cut was pretty much as expected, and it supports the financial and capital markets activity the market has been depending on, particularly around capex and the buildout in AI and technology, including the hyperscaler data centre complex,” said Arnim Holzer, Global Macro Strategist at Easterly EAB Risk Solutions.

The Dow Jones Industrial Average was trading 1.22 per cent – or 581 points higher – following Mr Powell's news conference. The S&P 500 and Nasdaq Composite were up 0.81 and 0.50 per cent, respectively.

Dissents and mandate tension

Three officials dissented the latest move, the most since 2019.

Fed Governor Stephen Miran voted against the move in favour of a 50-basis point cut, while Chicago Fed President Austan Goolsbee and Kansas City Fed President Jeffrey Schmid argued to hold rates steady. It was the first time since 2019 a Fed decision featured three dissents.

The dot plot also suggested there were six “soft dissents”, in which officials may have voted in line with Mr Powell but preferred to have held rates steady this week. It is unclear how many of those were voting members.

A cargo ship sits in New York Harbour on November 19. AFP

This comes as the Fed’s dual mandate of tackling inflation and ensuring full employment come into greater tension with each other.

“Interestingly, everyone around the table at the FOMC agrees that inflation is too high and we want it to come down, and agrees that the labour market has softened and that there's further risk,” Mr Powell said. “Everyone agrees on that where the difference is, is how you weight those risks.”

Mr Powell said there are currently greater risk to the labour market, which is exhibiting behaviours of a low-hire low-fire environment. Private-sector data from payroll processing firm ADP also showed employers shed 32,000 jobs in November, while major companies have announced mass layoffs.

Still, inflation remains above the Fed’s 2 per cent target goal. But Mr Powell said the Fed has made progress on rising prices that are not related to tariffs, suggesting they are making progress on an increase in the services sector.

“This is such a unique situation. It's not the 1970s … but we do have tension between our two goals, so that's just unique in my time at the Fed,” he said.

Mr Powell did not speak on how the Fed expects from the Supreme Court’s coming decision on the legality of Mr Trump’s use of emergency tariffs.

Fed raises growth forecast

Other updated projections released by the Fed showed it expects the US economy to grow by 2.3 per cent next year, a jump of half a percentage point from its previous forecast.

“AI spending will continue. The consumer continues to spend. So it looks like the baseline would be solid heading into next year,” Mr Powell said.

It still expects the unemployment rate to fall to 4.4 per cent in 2026, unchanged from September. The Fed slightly lowered its inflation outlook, inflation to rise to 3.0 per cent this year (compared to 3.1 per cent in September) and 2.5 per cent in 2026 (versus 2.6 per cent).

Trump decision on Powell successor looms

Wednesday’s decision also comes as President Donald Trump is expected to nominate who will succeed Mr Powell when his term as Fed chair expires in May. Mr Powell has not said if he will stay on the Fed board throughout his term as a governor, which runs until 2028.

White House economic adviser Kevin Hassett, seen as the runaway front-runner for the job, said Mr Trump will finalise his choice within the next two weeks.

National Economic Council director Kevin Hassett speaks with US President Donald Trump in the Oval Office. Reuters

Earlier this week, Mr Trump suggested that immediately lowering interest rates would be a determining factor in who will next lead the US central bank.

When asked by Politico this week if immediately cutting rates is a “litmus test” for his selection of the next Fed leader, Mr Trump, who has pushed for greater control over the Fed, said “yes”.

When asked what he would do if Mr Trump pushed for a rate cut when he did not think it was the appropriate action to take, Mr Hassett said “you can't cut rates” when inflation jumps to 4 per cent, and that he would stick with “my judgment, which I think the President trusts”.