The US Federal Reserve has delivered its third interest rate cut of the year, yet the decision has done little to settle doubts about where monetary policy is heading next. Instead, the move has highlighted growing divisions within the central bank, raising uncertainty about how quickly, or even whether, further cuts will follow. The ongoing debate reflects the difficult position the Fed finds itself in as it tries to manage a slowing labour market while inflation remains uncomfortably high.
On Wednesday, the central bank confirmed a 0.25 percentage point reduction to its benchmark lending rate, moving it into a range of 3.50% to 3.75%. This marks the lowest level the policy rate has reached in three years. The change is an attempt to support economic activity at a time when several indicators suggest the US economy is losing momentum, particularly in jobs growth.
Despite the rate cut, the Fed’s updated economic projections point to just one further reduction next year. Policymakers stressed that this outlook is not fixed, as new economic data could easily alter their stance. The January meeting is expected to be a crucial moment as officials assess whether the recent cuts are enough, or if more intervention will be needed to support the economy.
Fed chair Jerome Powell emphasised that the bank needs more time to understand how the three cuts this year are feeding into consumer spending, business investment and financial markets. He said the bank is watching the data closely, particularly given the unusual economic environment created by rising prices, political tensions and global uncertainty.
Powell stressed that the Fed is in a position to pause and observe how conditions unfold. This patience may not satisfy those calling for faster action, including former President Donald Trump, who has repeatedly argued that lower interest rates are essential for supporting economic growth and keeping the US competitive globally.
During a press conference, Powell admitted that the central bank is dealing with a “very challenging situation”. On one side of the equation are slowing job numbers; on the other, persistent inflation pressures. He emphasised that the Fed cannot solve both problems simultaneously, and any decision risks aggravating one issue while easing the other.
Those internal tensions were reflected in the vote, where three senior Fed officials dissented. Stephen Miran argued for a steeper 0.5 percentage point cut, citing the need for stronger support for the job market. In contrast, Austan Goolsbee and Jeffrey Schmid believed rates should remain unchanged, suggesting they saw inflation as a more immediate concern than unemployment.
Trump, who has been vocal about his dissatisfaction with the pace of rate cuts, criticised the decision shortly after it was announced. He argued that the reduction should have been “at least doubled,” claiming that US rates ought to be among the lowest globally. His comments highlight how monetary policy has become increasingly political, adding to the pressure on Powell and the Fed.
Complicating matters further is the lingering impact of the longest government shutdown in US history, which ended only in November. The shutdown delayed significant portions of economic data, leaving Federal Reserve officials without a full picture of the country’s financial health. Even now, gaps remain in the data, making policymaking harder than usual.
The jobs market remains a key concern. The latest delayed figures showed the unemployment rate rising from 4.3% to 4.4% in September. While the increase is modest, it adds to a growing sense that the labour market is cooling. Cutting interest rates lowers borrowing costs for businesses, which can encourage hiring and investment.
Inflation, however, remains stubborn. It reached 3% in September—still above the Fed’s 2% target. Analysts note that ongoing tariffs have pushed some consumer prices higher, though softer-than-expected recent readings have given the Fed a little more breathing space to focus on job creation for the moment.
Financial consultant Colleen McHugh explained that the combination of above-target inflation and political pressure makes the Fed’s job particularly difficult. While rising prices could justify keeping rates steady, the weakening labour market seems to have pushed the central bank towards easing. She expects between one and two more rate cuts in the coming year, depending on how conditions evolve.
Disagreement within the Fed is becoming more pronounced. Powell acknowledged that it is unusual to have ongoing tension between the central bank’s dual responsibilities: keeping inflation stable while ensuring unemployment stays low. He noted that when the two goals conflict, debate is inevitable. Still, he described discussions among policymakers as respectful and grounded in genuine concern for the economy.
The next major milestone for the Fed will come with the release of fresh data on both inflation and employment. These figures, due next week, could significantly reshape the policy outlook. Any further weakness in the labour market would strengthen the case for additional cuts next year, while unexpectedly strong inflation figures could force the Fed to hold steady.
Adding to the uncertainty is the question of who will lead the Federal Reserve once Powell’s term ends in May. Trump is reportedly close to selecting a successor, and several names have been mentioned. Kevin Hassett, a long-time conservative economist and former adviser to Trump, is widely seen as the frontrunner, though concerns have been raised about whether he would maintain the Fed’s independence.
Other possible candidates include Kevin Warsh, Fed Governor Christopher Waller and Treasury Secretary Scott Bessent. Analysts warn that markets may react nervously if Trump chooses someone seen as too politically aligned, as investors rely on the Fed to operate independently from political influence.
When asked whether the ongoing search for his replacement was influencing his decisions, Powell replied firmly that it was not. For now, he stressed, the Fed’s primary focus remains on navigating the delicate balance between supporting the job market and keeping inflation under control—no easy task in the current climate.
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