The Federal Reserve delivered its third consecutive interest rate cut on Wednesday (Dec. 10), lowering the benchmark federal funds rate by 25 basis points to a range of 3.5%–3.75%, the lowest in three years. Yet the bigger story was not the cut itself, but the signal that policymakers are preparing for a "halftime break"—a pause in easing as divisions within the committee deepen over how to balance inflation risks with a cooling labor market.
A Divided Committee
The vote was 9–3, the first time in six years that three officials dissented. Chicago Fed President Austan Goolsby and Kansas City Fed President Jeffrey Schmid argued the cut was unnecessary, while Governor Milan favored a larger 50-basis-point move. The split underscores growing tension between hawks focused on inflation and doves worried about employment.
Chairman Jerome Powell defended the decision, saying the Fed was "prepared to wait and see how the economy evolves." He acknowledged that job growth since April may have been overstated and is now cooling more gradually than expected.
Labor Market Concerns
The Fed’s statement dropped its description of unemployment as "remaining low." The rate has edged up from 4.1% earlier this year to 4.4% in September. Powell noted that while inflation progress has stalled, the risk of a sharper slowdown in jobs justified the cut.
Still, officials raised their growth forecasts for 2026, suggesting confidence that easing will support employment. Most policymakers project at least one more cut next year, but the pace of easing is unlikely to accelerate.
Hawks vs. Doves
The divide is stark. Hawks argue the economy is stronger than it appears and worry that rates are no longer high enough to restrain inflation, which has exceeded the Fed’s 2% target since 2021. Doves counter that lower rates have yet to revive housing or labor markets, warning that unemployment risks are asymmetric—harder to reverse than inflation hovering near 3%.
Powell has leaned dovish since August, when the employment outlook dimmed. But the dissenting votes highlight that he is navigating policy with the weakest internal support of his tenure.
Echoes of the 1970s
The Fed’s dilemma recalls the stagflation era of the 1970s, when stop-and-go policies entrenched high inflation. Powell downplayed the divisions, calling them natural given the Fed’s dual mandate of stable prices and maximum employment. Yet the parallels are hard to ignore: persistent price pressures alongside a gradually cooling labor market.
Market Impact
Short-term borrowing costs tied to the federal funds rate—credit cards, auto loans—will ease modestly. But longer-term rates, crucial for mortgages and business investment, remain stubborn. The 10-year Treasury yield, which fell to 4.01% before the Fed’s first cut in September, stood at 4.185% on Tuesday, limiting relief for homebuyers.
Jonathan Pingle, UBS economist, noted that each cut erodes consensus: "With each rate cut, you lose more support from participants, and you need data to convince them."
Powell’s Insurance Strategy
Powell described the cuts since September as "insurance" against labor market weakness, first hinted at during the Jackson Hole symposium. The challenge now is to signal that this phase is complete without ruling out further action if jobs deteriorate.
Upcoming data will be critical. The Labor Department releases October and November employment figures next week, with December data due before the Fed’s late-January meeting. Rising jobless claims and layoffs could sway the committee.
Inflation Still a Threat
Inflation remains above target. The September gauge was 2.8%, and Citigroup’s Nathan Sheets warns that tariff-related costs could be passed through in January price resets. "If we’re going to see more tariff cost pass-through, the natural timeframe is during annual price increases," he said.
Sheets cautioned that the Fed has little margin for error: "You haven’t reached the 2% target, and there are no convincing signs you’ll be back soon."
Political Uncertainty
Powell’s term ends in May, leaving him just three more meetings to steer policy. President Trump has said he will nominate a successor, raising questions about whether the next chair can command the same confidence. Markets are already factoring in the risk of political influence on monetary policy.
Outlook for 2026
Most Fed officials expect one more cut next year, consistent with September projections. But the path is clouded by internal divisions, inflation risks, and political uncertainty. Investors should watch:
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Employment data: Rising jobless claims or layoffs could force more cuts.
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Inflation trends: Tariff pass-throughs and price resets may keep inflation sticky.
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Treasury yields: The 10-year yield remains the best indicator of market sentiment.
Conclusion: A Pause With Risks
The Fed’s December decision marks a turning point. Rate cuts totaling 1.75 percentage points over 15 months have provided insurance against labor weakness, but divisions within the committee and persistent inflation mean the threshold for further easing is higher.
For investors, the message is clear: the Fed is pausing, but not done. The next moves will depend on data, politics, and Powell’s ability to balance competing pressures in the final months of his tenure.