The Federal Reserve cuts interest rates again: internal divisions become apparent, with three dissenting votes being the only one in six years.

Author: Chloe, ChainCatcher

The last Federal Reserve meeting of the year has concluded, with the Fed announcing a 25 basis point cut to the benchmark interest rate, bringing it to a range of 3.50%-3.75%, as expected by the market. This marks the third consecutive meeting with a rate cut. Since September, the Fed has cumulatively cut rates by 75 basis points. The decision passed with a 9-3 vote, with two members opposing the rate cut and one supporting a 50 basis point cut.

At the same time, the Fed launched a Treasury bill program to maintain an ample supply of reserves. Reuters reported that this technical purchase will begin on December 12, with the first round of Treasury bill purchases reaching approximately $40 billion.

The Federal Reserve, having just decided to end its balance sheet reduction in early December, has quickly shifted to a slight expansion of its balance sheet to address recent pressures in the repurchase market and volatility in the short-term funding market. Powell ruled out a rate hike, emphasizing that the core mission is to maintain the 2% inflation target. According to the policy statement, economic activity is growing moderately, but the labor market is weakening, the unemployment rate is rising, and inflation remains high. To achieve maximum employment and the 2% inflation target, the Fed lowered the interest rate range and will decide on future adjustments based on the latest data and risk assessment. The Committee will continue to monitor the labor market, inflation expectations, and domestic and international financial developments. Meanwhile, to ensure sufficient reserves, a short-term Treasury purchase program will be launched. Operationally, the Board of Governors unanimously agreed to adjust relevant interest rates and instructed open market operations, including repurchase reinvestment, to support policy implementation. At the press conference, Powell stated that the reason for the rate cut was that inflation still faced upward pressure, while the labor market began to weaken, causing the two goals to pull against each other. He emphasized that there is never a risk-free policy, and that interest rates have now returned to the "broadly neutral range," with the policy stance "quite appropriate," allowing officials to more patiently observe the data before deciding on the next step, rather than setting a predetermined direction. He hinted that the downside risks to the labor market were greater than those to inflation, and that inflation above the target was mostly driven by tariffs and was temporary. Powell ruled out the possibility of a rate hike and reiterated that the Fed's core mission is to "maintain the 2% inflation target" and "support maximum employment," and all policy adjustments are based on these principles. Regarding the economic outlook, Powell pointed out that consumption and business investment were robust, and although the housing market was weak, overall momentum was strong. The recent brief shutdown of the federal government affected the economy this quarter, but is expected to partially ease next quarter. The Federal Reserve's latest Special Economic Projections (SEP) have raised its GDP growth forecasts for this year and next year to 1.7% and 2.3%, respectively. The more optimistic outlook for next year is mainly due to resilient consumer spending, coupled with increased corporate capital expenditure driven by AI-related data center and equipment investment. Excluding the impact of the government shutdown, GDP growth next year is estimated at approximately 2.1%. The "dot plot" released after the meeting shows that most policymakers expect another 25 basis point rate cut in 2026, consistent with their September forecast. However, Powell emphasized that this does not imply a guaranteed rate cut or a halt to rate cuts, but rather aims to clarify that the Fed's next move depends entirely on economic performance, not on predetermined directions. Internal divisions within the Fed have widened, with Trump stating that the rate cut was too small. However, this decision further highlights the unusual divisions within the Federal Reserve. Nine members, including Chairman Powell and Vice Chairman John Williams, voted in favor of the action; those who opposed it included Stephen Milan (who favored a 50-basis-point cut), and Austin Goolsby and Jeffrey Schmid (who favored keeping rates unchanged). This is the first time since 2019 that there have been three dissenting votes. Furthermore, not only the two officials mentioned in the statement who did not support the rate cut, but other policymakers also showed hesitation: only four branch Fed offices requested a reduction in the discount rate (the rate the Fed charges for emergency loans to commercial banks), and six policymakers favored keeping interest rates in the 3.75%-4% range by the end of next year in their economic forecasts. Nick Timiraos, a vocal critic of the Fed, pointed out that officials are deeply divided on whether inflation or the job market should be a greater concern, which may depend on how Powell proceeds. Powell's term expires next May, and he has only three more interest rate-setting meetings remaining. Following the announcement of the rate decision, US stocks and bonds rose in tandem, with the Dow Jones Industrial Average gaining nearly 500 points. US Treasury yields and the US dollar index weakened, and the interest rate swap market projected another 50 basis point rate cut next year. However, the cryptocurrency market reacted mutedly, with Bitcoin remaining in the $90,000-$91,000 range and Ethereum fluctuating between $3,200 and $3,300. The cryptocurrency fear and greed index fell from 30 to 29. US President Trump stated that the rate cut was too small and could have been larger.