Interest Rate Decision and Market Reaction
The Federal Reserve reduced its benchmark rate by 25 basis points on Wednesday, a decision that highlighted unusual divisions among policymakers regarding the future direction of monetary policy.
The Federal Open Market Committee lowered the federal funds rate to a range of 3.50% to 3.75%, marking the third consecutive quarter-point reduction. This move was met with dissent from two regional Fed presidents who preferred to hold rates steady. Furthermore, Fed Governor Stephen Miran advocated for a more aggressive 50-basis-point reduction. The resulting 9-3 split vote is notably contentious for the central bank.
In the immediate aftermath of the announcement, Bitcoin traded near $92,400, exhibiting volatility. U.S. stocks experienced modest gains, while the 10-year Treasury yield declined by two basis points to 4.15%. This decision brings short-term borrowing costs to their lowest level since 2022.
Economic Outlook and Fed Projections
The Fed stated that uncertainty surrounding the economic outlook remains elevated. Officials also noted an increase in downside risks to employment in recent months. To address declining reserve balances that required intervention, the central bank announced plans to restart purchases of shorter-term Treasury securities.
Updated economic projections indicate that core inflation is now expected to be 3% for 2025 and 2.5% for 2026, both figures being 10 basis points lower than previous estimates. GDP growth projections were revised upward to 1.7% for the current year and 2.3% for 2026, compared to earlier forecasts of 1.6% and 1.8%, respectively. The dot plot, which reflects policymakers' interest rate expectations, remained largely unchanged, with most anticipating only one rate cut in 2026, despite market pricing for two.
Dissenting Views and Market Influences
Kansas City Fed President Jeffrey Schmid and Chicago Fed President Austan Goolsbee voted to maintain the current policy. Both had publicly expressed opposition to easing monetary policy in recent weeks. Their dissent reflects broader concerns within the Fed about the speed of rate reductions, with several members having voiced opposition not only to Wednesday's cut but also to the reduction in October.
Prior to Fed Chair Jerome Powell's post-meeting press conference, traders had priced in a 24% probability of another rate cut in January, according to CME FedWatch data. The decision occurred while policymakers are operating without several key economic data releases, which have been delayed due to the recent government shutdown. President Trump has continued to criticize Chair Powell and is reportedly searching for a replacement as Powell's term concludes next year.
Future Policy Stance and Market Uncertainty
The Fed's statement committed to carefully assessing incoming data before implementing any further adjustments to monetary policy. Markets face uncertainty as the year-end approaches, with the central bank balancing concerns about softening labor markets against persistent inflation pressures.
The decision to resume Treasury bill purchases, often referred to as "QE-lite," introduces an additional layer to the Fed's policy approach as it manages reserve levels while navigating conflicting economic signals.