The Federal Reserve lowered its benchmark interest rate by a quarter of a percentage point Wednesday while signaling that it may be nearing the end of its rate-cutting effort, with no cuts expected over the next few months and just one reduction projected over the next year.
The third cut of 2025 reduces the federal funds rate to a range between 3.5% and 3.75%, the lowest level in three years.
There was some dissent on the central bank's Federal Open Market Committee as officials sought to strike a balance between cutting rates to boost a sagging labor market and holding rates steady to maintain pressure on a stubbornly elevated inflation rate, which remains above the central bank's 2% target.
Stephen Miran, recently appointed to the Fed by President Trump, voted for a larger rate cut, while Kansas City Fed President Jeffrey Schmid and Chicago Fed President Austan Goolsbee voted to keep rates unchanged. It was the first time there were three dissenting votes among the 12 voting members since 2019, CNBC's Michelle Fox reports.
Counting on inflation to ease: At a press conference following the conclusion of the central bank's last meeting of the year, Fed Chair Jerome Powell told reporters that officials are now close to a neutral rate that will both sustain the labor market and restrain inflation.
"This further normalization of our policy stance should help stabilize the labor market while allowing inflation to resume its downward trend toward 2% once the effects of tariffs have passed through," he said.
"We're in the high end of the range of neutral," Powell added. "It's so happened that we've cut three times. We haven't made any decision about January, but as I said, we think we're well positioned to wait and see how the economy performs."
Powell said the current elevated rate of inflation is due largely to the tariffs Trump imposed on trade partners around the world over the last nine months. Fed officials expect inflationary pressure to ease after importers make a one-time adjustment to their prices.
"Let's assume there are no major new tariff announcements - inflation from goods should peak in the first quarter," Powell said.
Projections by Fed officials show they expect inflation to peak at 2.9% this year, while falling to 2.4% next year and 2.1% in 2027.
Powell also noted that Fed officials are optimistic about economic growth in 2026, driven by improvements in productivity. The projections show the economic growth rate rising to 2.3% in 2026, with the unemployment rate falling from a peak of 4.5% this year to 4.4% next year and 4.2% in 2027.
Trump, who has called for much lower rates, kept up his war of words against Powell in comments at the White House Wednesday, calling the Fed chief a "stiff" who approved "a rather small" cut. Accusing the Fed of killing growth, Trump said the rate reduction could have been "at least doubled."
The president may get what he wants in just a few months. Powell's term as chair ends in May, and the replacement selected by Trump is expected to push for another rate cut as soon as possible.