Federal Reserve cuts rates for third time to 3.5-3.75%, says inflation remains elevated

US Federal Reserve

The U.S. Federal Reserve trimmed its benchmark interest rate by 25 basis points, marking a third consecutive cut, bringing rate down to the 3.5 to 3.75 percent range, its lowest level since 2022.

The decision saw pushback from both ends. Kansas City Fed president Jeff Schmid and Chicago Fed president Austan Goolsbee dissented, arguing for holding rates unchanged. Meanwhile, Fed governor Stephen Miran preferred a deeper cut of half a percentage point.

As a result of the U.S. Government shutdown earlier this quarter, certain key data were not collected. Therefore, the Federal Reserve had hinted that any uncertainty and lack of clear data could impact the result of the December meeting.

The central bank said, "Available indicators suggest that economic activity has been expanding at a moderate pace. Job gains have slowed this year, and the unemployment rate has edged up through September. More recent indicators are consistent with these developments. Inflation has moved up since earlier in the year and remains somewhat elevated."

The six weeks since the last Fed meeting laid bare the differing opinions over how many more rate cuts are needed. As officials volleyed preferences back and forth, with some urging more to support a flagging labor market and others arguing for a pause as they eyed persistent inflation, market odds of a December rate reduction swung in tandem.

Ahead of the meeting, policymakers seemed unusually split on whether that move is justified. This is the Fed’s final decision of the year, and the debate has been complicated by limited economic data after the autumn government shutdown, which delayed or disrupted key reports on jobs and inflation.

Adding to the tension was the strained dynamic between Fed Chair Jerome Powell and President Donald Trump, who has repeatedly criticised Powell this year for not cutting rates sooner or more aggressively. Trump earlier this year repeatedly called for the Fed to get its benchmark down below 2 percent.

"We'll be announcing somebody probably early next year for the new chairman of the Fed," Trump said at a meeting of his cabinet, two days after telling reporters on Air Force One that he had decided on a pick. Trump hinted the possibility that it might be the director of the White House National Economic Council, Kevin Hassett.

Brian Buetel, managing director at UBS Wealth Management, expects the easing cycle to extend into early 2026, with two more rate cuts likely after December. He believes this backdrop should keep the stock market grinding higher into the end of the year.

“The combination of lower rates, artificial intelligence, rising productivity and continued fiscal support through infrastructure spending could help markets reach escape velocity in 2026,” he said.