Federal Reserve Cuts Interest Rates Again: Internal Divisions Highlighted, Three Votes Against Seen for the First Time in Six Years

Author: Chloe, ChainCatcher

The last interest rate meeting of the year has concluded, with the Federal Reserve announcing a 25 basis point cut to the benchmark interest rate, bringing it to a range of 3.50%-3.75%, marking the third consecutive meeting of rate cuts. Since September, the Federal Reserve has cumulatively lowered rates by 75 basis points. The decision passed with a 9:3 voting ratio, with two dissenting members supporting maintaining rates and one supporting a 50 basis point cut.

At the same time, the Federal Reserve has initiated a Treasury bill program to maintain sufficient reserves. According to Reuters, this round of technical purchases will begin on December 12, with the first round of Treasury bill purchases amounting to approximately $40 billion.

The Federal Reserve has just decided to end its balance sheet reduction in early December and has quickly shifted to a slight expansion of the balance sheet to address recent pressures in the repurchase market and fluctuations in the short-term financing market.

Powell Rules Out Rate Hikes, Emphasizes Core Mission to Maintain 2% Inflation Target

According to the policy statement, economic activity is growing moderately, but the labor market is showing signs of weakness, with rising unemployment and still high inflation levels. To achieve maximum employment and a 2% inflation target, the Federal Reserve has lowered the interest rate range and will decide future adjustments based on the latest data and risk assessments. The committee will continue to monitor the labor market, inflation expectations, and domestic and international financial dynamics. Additionally, to ensure sufficient reserves, a short-term Treasury bond purchase program will be initiated.

On the operational level, the Board of Governors of the Federal Reserve unanimously agreed to adjust the relevant rates and instructed to conduct open market operations, including repurchase reinvestments, to support policy implementation.

At the press conference, Powell also stated that the reason for this rate cut is that inflation still has upward pressure, while the labor market is beginning to weaken, causing a tug-of-war between the two main goals. He emphasized that there is never a zero-risk policy, and the current rates have returned to a "broadly neutral range," with the policy stance being "quite appropriate," allowing officials to observe data more patiently before deciding on the next steps, rather than pre-setting a direction. He hinted that the downside risks to the labor market are greater than those to inflation, and that the inflation above target is largely driven by tariffs and is temporary.

Powell ruled out the possibility of rate hikes and reiterated that the core mission of the Federal Reserve is to "maintain the 2% inflation target" and "support maximum employment," with all policy adjustments being based on this principle.

In terms of economic outlook, Powell pointed out that consumer spending and business investment are robust, the housing market is weak, but overall momentum is strong. The recent short government shutdown has impacted this quarter's economy, but it is expected to partially ease next quarter.

According to the Federal Reserve's latest economic projections (SEP), the GDP growth estimates for this year and next have been raised to 1.7% and 2.3%, respectively. The growth outlook for next year is more optimistic, primarily due to strong consumer spending, coupled with investments in AI-related data centers and equipment boosting business capital expenditures. Excluding the impact of the government shutdown, next year's GDP growth is expected to be around 2.1%.

The "dot plot" released after the meeting shows that most policymakers expect another 25 basis point cut in 2026, consistent with the September forecast. However, Powell emphasized that this does not imply that the next step will definitely be a rate cut or a halt to rate cuts, but rather that the Federal Reserve's next move will entirely depend on economic performance, rather than a pre-set direction.

Divisions Within the Federal Reserve Widen, Trump Says Rate Cut Is Too Small

However, this decision highlights the unusual divisions within the Federal Reserve. Those voting in favor of the action included Chair Powell, Vice Chair John Williams, and seven other members; the dissenters included Stephen Miran (who favored a 50 basis point cut), as well as Austan Goolsbee and Jeffrey Schmid (who preferred to maintain the current rate). This is the first instance of such a three-vote dissent since 2019.

Moreover, not only the two officials mentioned in the statement who did not support the rate cut, but other decision-makers also showed hesitation: only four regional Federal Reserve banks proposed applications to lower the discount rate (the rate the Fed charges commercial banks for emergency loans), and six decision-makers preferred to keep the rate at the 3.75%-4% range by the end of next year in their economic forecasts.

"Federal Reserve mouthpiece" Nick Timiraos analyzed that there is a serious divide among officials on whether inflation or the labor market should be the greater concern, which may depend on how Powell proceeds. Powell's term will end in May next year, and he has only three more rate-setting meetings left.

Following the announcement, U.S. stocks and bonds rose simultaneously, with the Dow Jones Industrial Average climbing nearly 500 points, U.S. Treasury yields and the dollar index weakening, and the interest rate swap market estimating another 50 basis point cut next year. However, the cryptocurrency market reacted mildly, with Bitcoin maintaining in the $90,000-$91,000 range and Ethereum fluctuating between $3,200-$3,300. The fear and greed index in the cryptocurrency market dropped from 30 to 29.

U.S. President Trump commented that the rate cut was too small and could have been larger.