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Federal Reserve Cuts Key Interest Rate, Hints at Slower Pace for 2026
WASHINGTON D.C. – The Federal Reserve delivered its third consecutive interest rate cut on Wednesday, reducing its benchmark federal funds rate by 0.25 percentage points. This move brings the rate to its lowest level in over three years, now set between 3.5% and 3.75%.
The decision reflects the Fed’s ongoing assessment of the U.S. economy, which has seen a slowdown in monthly job growth and rising inflation. Notably, a recent report from ADP, which tracks private payrolls, indicated a loss of 32,000 jobs in November, signaling persistent challenges in the labor market.
Looking Ahead: A Single Rate Cut in 2026?
Despite the latest reduction, the Federal Reserve’s accompanying quarterly economic projections suggest a more cautious approach to future rate adjustments. Officials signaled they anticipate only one additional rate cut in 2026, indicating a desire for more concrete economic evidence before further easing monetary policy.
The Federal Open Market Committee (FOMC) stated, “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.”
Fed Chair Jerome Powell, speaking at a press conference, echoed this sentiment, emphasizing the central bank’s readiness to “wait to see how the economy evolves.” He highlighted that upcoming delayed economic reports for November, including inflation and job figures, will be crucial in shaping future decisions.
The Fed also released updated projections for 2026, forecasting a slight cooling of inflation to 2.4% (as measured by Personal Consumption Expenditures) from an estimated 2.9% in 2025. Unemployment is expected to remain stable at its current 4.4%, while gross domestic product (GDP) could accelerate to 2.3% in 2026, an improvement from September’s 1.8% forecast.
Ryan Sweet, chief global economist at Oxford Economics, interpreted the Fed’s guidance as setting the stage for an “extended pause” in rate cuts. Sweet suggested that monetary policy may have limited impact on current labor market challenges, which he attributes to factors such as “overhiring, solid productivity growth, policy uncertainty, a rise in people with multiple jobs and less immigration.”
Historically, the Fed had been raising rates to combat surging inflation during the pandemic, with the federal funds rate reaching 3.75% to 4% in November 2022. By cutting rates, the central bank aims to stimulate economic activity by making borrowing cheaper for businesses, encouraging expansion and hiring, and incentivizing consumer spending.
Divisions Within the FOMC
The decision to cut rates by a quarter point was not unanimous among the FOMC’s rate-setting panel. While Fed Chair Jerome Powell and eight other committee members voted in favor, three members dissented, marking the most dissents in six years and indicating internal divisions on a committee traditionally known for consensus.
FOMC members Austan Goolsbee and Jeffrey Schmid voted to maintain the previous rate range, while Stephen Miran advocated for a more substantial 0.5 percentage-point cut.
Looking ahead, the Federal Reserve is also approaching a leadership transition, with Chair Powell’s term set to conclude in May 2026. This imminent change may influence future policy decisions, as noted by Jeff Schulze, head of economic and market strategy at ClearBridge Investments.
When asked about his priorities for the remainder of his term, Powell reiterated his commitment to the U.S. economy, stating, “I want to turn over this job to whoever replaces me with the economy in really good shape.”