A Divided Fed Cuts Rates, but Signals Slower Pace for 2026

Fed Chair Jerome Powell
Reuters
By Yuval Rosenberg and Michael Rainey

Happy Wednesday! The Federal Reserve lowered interest rates as expected today, but the cut came with clear indications that it may be the last reduction for a while. Here's what's happening.

A Divided Fed Cuts Rates Again, Signals Slower Pace for 2026

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.

House Passes $900 Billion Defense Policy Bill

The House on Wednesday passed the final version of the National Defense Authorization Act for 2026, which calls for spending $900 billion on military programs. The bill now heads to the Senate for final passage.

The 312-112 House vote saw 18 Republicans and 94 Democrats oppose the measure and followed a bit of floor drama as GOP leaders had to work to persuade a number of conservatives to back a procedural vote on the must-pass bill. In the end, after more than an hour, four of the five GOP holdouts - Reps. Lauren Boebert, Tim Burchett, Anna Paulina Luna and Marjorie Taylor Greene - switched their votes after winning some concessions, allowing the bill to advance.

The NDAA would provide a 3.8% pay raise for the military, repeals the 1991 and 2002 authorizations of military force against Iraq and includes a provision that would withhold a quarter of Defense Secretary Pete Hegseth's travel budget unless the Pentagon provides Congress with unedited video of a controversial September 2 "double tap" strike on an alleged drug boat in the Caribbean.

The White House on Tuesday said it "strongly supports" the defense bill and touted that it would codify aspects of more than a dozen of Trump's executive orders and actions.

In a speech on the House floor, Armed Services Committee Chairman Mike Rogers said the bipartisan bill reflects lawmakers' efforts to fix "the Pentagon's broken acquisition process, which is failing our warfighters."

"This is a strong bipartisan bill that delivers for our warfighters and deters our adversaries," he said. "It will fundamentally reform the defense acquisition enterprise."

Trump Veers Off Message in 'Affordability' Speech

President Trump speech Tuesday night at a campaign-style rally in Mount Pocono, Pennsylvania, was supposed to focus on Americans' affordability concerns and promote the president's economic agenda, launching a 2026 schedule of events around the country addressing voter anxieties about elevated prices and stagnant wages. It didn't quite work out that way.

Trump rambled and meandered through more than 90 minutes of remarks reminiscent of his 2024 campaign attacks. While much of his speech was indeed devoted to inflation and economic issues - and while Trump acknowledged that there is more work to be done on both - he also blamed Democrats for inflation, mocked Democrats' use of the word "affordability," told parents that their kids didn't need quite so many pencils or dolls, floated the idea of investigations into Biden-appointed Fed officials, and made a slew of off-prompter, off-color digressions that dominated Wednesday morning headlines, including vicious, racist attacks on Rep. Ilhan Omar and immigrants from what he called "shithole countries."

"You know, I have fun. I have fun," Trump said. "I haven't read practically anything off the stupid teleprompter."

(Omar responded in a post on Bluesky: "Trump's obsession with me is beyond weird," she wrote. "He needs serious help. Since he has no economic policies to tout, he's resorting to regurgitating bigoted lies instead. He continues to be a national embarrassment.")

Trump's comments suggesting that Americans can go without some things came as part of a defense of his efforts to promote American industry and a criticism of China. "You can give up pencils, because under the China policy, you know every child can get 37 pencils," he said. "They only need one or two. You know, they don't need that many, but you always need - you always need steel. You don't need 37 for your daughter. Two or three is nice, but you don't need 37 dolls. So we're doing things right. We're running this country right."

The cheering crowd at the rally obviously agreed, but Republicans facing re-election races and forced to again answer questions about Trump's comments probably weren't as pleased. And the news reports coming out of the speech certainly didn't reflect the kind of focus on economic concerns GOP strategists might have preferred.

"At the first stop on his affordability tour, Trump mocks affordability," The Washington Post's headline about the speech read.

The Associated Press piece was titled: "Trump's speech on combating inflation turns to grievances about immigrants from 'filthy' countries."

The bottom line: Trump undercut the economic message he was supposed to deliver. Susie Wiles, Trump's White House chief of staff, recently told a conservative YouTube show that she wants the president on the campaign trail for 2026 elections and intends to "put him on the ballot." But the president's first speech on what's supposed to be an affordability tour didn't deliver much reason for optimism for Republicans worried that Americans will blame them for not addressing kitchen-table issues.

Quote of the Day

"I don't think so."

‒ Elon Musk, in a podcast interview with Katie Miller, his former aide and the wife of Trump adviser Stephen Miller, when asked if he would start the Department of Government Efficiency if he had to do it all over again. Musk said that the DOGE cost-cutting effort was "a little bit successful" and "somewhat successful" but added that of he had to do it over he...wouldn't. "Instead of doing DOGE, I would have, basically, built ... worked on my companies," he said.

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