US Federal Reserve lowers interest rates for third time in a row

The Federal Reserve on Wednesday (US time) lowered interest rates again in a continued effort to keep the labour market intact, despite objections from several key Fed officials who believe the central bank should be prioritising the higher cost of living instead.

A majority of policymakers voted to lower the benchmark lending rate by a quarter point for the third consecutive time, to a range of between 3.5 percent to 3.75 percent, the lowest in more than three years.

Thursday's (NZT) decision drew three dissents - from Fed Governor Stephen Miran, Kansas City Fed president Jeffrey Schmid and Chicago Fed president Austan Goolsbee - the highest number of dissents since September 2019.

It's also the fourth consecutive meeting that a Fed decision wasn't unanimous, the longest stretch since 2019.

In their latest economic projections, Fed officials pencilled in just one rate cut next year, unchanged from their estimate in September. However, their latest policy statement suggests they're leaning toward staying on hold in the near term, stating they will "carefully assess" the "extent and timing" of any additional cuts.

More dissent than is typical

This year's rate cuts have been in response to mounting signs of a weakening labour market, including unusually slow job growth and higher unemployment among young people and minorities.

But those decisions haven't been easy, with the Fed's powerful rate-setting committee starkly divided on how to proceed with interest rates. While job growth has been stagnant, inflation remains well above the Fed's 2 percent target and is widely expected to creep higher next year as President Donald Trump's tariffs pack a bigger punch.

Fed officials are in disagreement in chairperson Jerome Powell's final few meetings at the helm of the central bank, clashing over which side of their dual mandate to prioritise: full employment or stable prices.

Miran cast a dissenting vote, just he did in the prior two meetings, backing a larger, half-point cut instead. Schmid, who also dissented at the prior meeting, again preferred to keep rates unchanged, this time joined by Goolsbee.

But the unusual division among Fed officials isn't necessarily a bad thing. Powell has characterised it as a "healthy debate" and several experts have told CNN that some level of disagreement moderates the Fed's behaviour and shows there isn't groupthink. Still, it makes it more difficult for Wall Street to assess the path of monetary policy.

In the weeks after the Fed's October decision when officials lowered rates for the second time this year, investors were split over whether there would be another rate cut in December - until New York Fed president John Williams weighed in.

Williams serves in a role that's historically closely aligned with the Fed chairperson, and in a 21 November speech, Williams said the bigger risk was around the labour market's health. Wall Street's expectations for a December cut flipped to around 70 percent from 40 percent after Williams spoke, according to futures.

Powell says data murky due to government shutdown

Powell during his opening remarks on Wednesday mentioned the government shutdown five times, noting that the delayed release of official economic data on jobs, inflation and other key metrics has made the Fed's outlook murky.

"Very little data on inflation has been released since our meeting in October," Powell noted.

But the Fed relies on other data, too, from third-parties. And that data, though less reliable than government statistics, confirmed the Fed's expectations of a slowing job market and rising inflation - a tricky mix that Powell called "a challenging situation".

"Although important federal government data for the past couple of months have yet to be released, available public and private sector data suggest that is the outlook for employment and inflation has not changed," Powell said.

Another way that the shutdown is affecting the Fed's calculus: It slowed down the economy in October and November. But Powell said the reopening will stimulate the economy this month and next, so the overall economy will make up the lost ground.

With the lack of data and the uncertain economic situation, Powell said the Fed was going to shift from three consecutive rate cuts to wait-and-see mode.

"It is a very challenging situation," Powell said. "I think we are in a good place to, as I mentioned, to wait and see how the economy evolves."

The path forward

Economists say there's a higher bar for another rate cut as soon as January, or at any point in 2026, likely requiring higher unemployment over a short period of time. The Labor Department next week releases inflation and employment data for October and November, which could easily shift the economic narrative in either direction.

Fed officials' expectations for just one cut in the coming year is in stark contrast with Trump's persistent demands for massive rate cuts.

The president has said he's close to naming the next Fed chair, to succeed Powell once his term ends in May. Trump said on Tuesday in an interview with Politico that Powell's successor will be expected to cut rates, which wouldn't be easy for that person to accomplish because of the Fed's structure.

The Fed chair has only one vote and cannot unilaterally veto the majority's policy decisions, meaning Trump's pick for Fed chair will have to persuade their colleagues to go along with several more rate cuts.

Two Fed officials who become voters next year - Dallas Fed president Lorie Logan and Cleveland Fed president Beth Hammack - have already expressed in recent public speeches reservations with lowering rates further. Among the Fed's 12 regional bank presidents, only four get voting power each year on a rotating basis, in addition to the New York Fed president, who has a permanent vote.

-CNN