The US Federal Reserve on Wednesday cut its policy rate by 25 basis points, the third consecutive reduction.
The policy rate, which was widely expected to signal a deliberate pivot toward easier policy as officials weigh slower labor market momentum and persistent but moderating inflation.
The decision brings the federal funds rate target to a range of 3.5%-3.75%, matching market expectations.
”In support of its goals and in light of the shift in the balance of risks, the Committee decided to lower the target range for the federal funds rate by 1/4 percentage point to 3-1/2 to 3-3/4 percent,” a release from the central bank said.
In considering the extent and timing of additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks. The Committee is strongly committed to supporting maximum employment and returning inflation to its 2 percent objective.
Market pricing and the immediate signal to investors
The Fed’s 25 basis point cut was widely priced in by markets heading into the announcement, so the decision itself triggered minimal immediate volatility.
The 9–3 vote once again reflected a split between hawkish and dovish views.
Governor Stephen Miran pushed for a larger, 50-basis-point cut, while Kansas City Fed President Jeffrey Schmid and Chicago Fed President Austan Goolsbee argued for no change at all.
In Fed terms, “hawks” typically prioritize fighting inflation and prefer higher rates, whereas “doves” focus on bolstering the labor market and generally support lower rates.
The traders focused on Powell’s forward guidance, specifically whether the Fed would signal openness to additional cuts in early 2026 or begin signaling a pause.
The tone mattered far more than the rate move itself, as investors tried to discern whether this third consecutive cut represented the middle of an easing cycle or potentially the end of it.
The statement emphasized that future rate decisions would be “data dependent” and that the committee would need to see further evidence of labor market weakness or disinflation before moving again.
One major trading desk described it as a “hawkish cut,” the Fed delivering the 25 basis points but simultaneously raising the bar for future easing.
This messaging created an immediate disconnect as investors had entered the meeting expecting potential guidance toward multiple 2026 cuts.
The Fed’s calculus
The FOMC statement refined language around future adjustments, emphasizing that decisions would hinge on “incoming data” and the “evolving outlook,” terminology Wall Street interpreted as preparation for a potential pause.
The real constraint ahead centers on inflation’s stubbornness above the 2% target and a labor market that, while cooling, has not deteriorated sharply.
Many economists expect just two more cuts through mid-2026, totaling 50 basis points beyond Wednesday’s move.
Fed officials will scrutinize December’s nonfarm payroll report and CPI release, both delayed by the government shutdown, to calibrate the next move.
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