San Francisco Frontiers - Divided US Fed makes third straight rate cut on jobs risks

The cut by a quarter percentage point brings rates to a range between 3.50 percent and 3.75 percent, the lowest in around three years.

The move was in line with market expectations, although the path ahead is less certain.

The Fed penciled in at least one more rate reduction next year, and flagged heightened risks to employment as it announced Wednesday's move.

But a rift within the central bank deepened with three officials voting against the modest reduction.

Chicago Fed president Austan Goolsbee and Kansas City Fed president Jeffrey Schmid instead sought to keep rates unchanged. Fed Governor Stephen Miran backed a bigger, half-percentage-point cut.

The Fed's rate-setting committee consists of 12 voting members -- including seven members of the board of governors, the New York Fed president and a rotation of reserve bank presidents -- who take a majority vote in deciding the path of rates.

On Wednesday, Fed officials also lifted their 2026 GDP growth forecast to 2.3 percent, from 1.8 percent previously.

They eased their inflation expectations slightly for the next year, and kept unemployment rate expectations unchanged.

These projections could shift as the central bank grapples with a delay in federal economic data releases after a record-long government shutdown.

The Fed also faces a turbulent year ahead with a new chief arriving after Fed Chair Jerome Powell's term ends in May, while political pressure mounts.

Miran's term expires in January, creating an opening among the Fed's top leadership, and Trump has sought to free up another seat by attempting to fire Fed Governor Lisa Cook this year.

Cook has challenged her ousting and the case remains before the courts -- she continues to carry out her role in the meantime.

- Caution ahead -

A contentious meeting that has multiple dissents is a "normal and healthy" sign, said Ryan Sweet of Oxford Economics.

Still, "more cuts now imply fewer later," he added in a note this week.

"The central bank will want time to gauge how past cuts are impacting the economy," he said.

Analysts said that a third consecutive rate reduction was likely, in order to manage risks to the labor market.

"The challenge facing the Fed next year is the potential jobless expansion, when GDP increases but employment gains are modest, at best," Sweet said. "This leaves the economy vulnerable to shocks because the labor market is the main firewall against a recession."

The most recent available figures confirmed a slowdown in the jobs market, while the government shutdown from October to mid-November delayed publications of more updated official data.

The Fed pursues maximum employment and stable prices in adjusting interest rates, although these goals can sometimes be in conflict. Lower rates typically stimulate the economy while higher levels hold back activity and tamp down inflation.

Powell is due to speak at a press conference after the announcement of the rate decision.

This week's gathering is the last before 2026, a year of key changes for the bank.

In a Politico interview published Tuesday, Trump signaled he would judge Powell's successor on whether they immediately cut rates. Interviews for his choice are entering the final stages.

Trump earlier hinted that he wants to nominate his chief economic adviser Kevin Hassett.

Other top contenders include former Fed official Kevin Warsh, Fed governors Christopher Waller and Michelle Bowman, and Rick Rieder of BlackRock.

I.Sanders--SFF