The Fed cuts interest rates again. But it's divided about what comes next

The Federal Reserve announced a final rate cut of 25 basis points on Wednesday for the third time this year — extending an easing cycle that began in September. While prediction markets had all but locked in the reduction, this month’s vote nevertheless landed in an unusually murky and charged environment.

One culprit? Lingering effects of the U.S. government shutdown, which began in October and lasted through much of November, and which continues to delay key economic reports. Several key data releases were canceled outright, including October’s jobs and CPI reports. Some November reports remain delayed as agencies work through the backlog.

As a result, Fed Chair Jerome Powell and his fellow policymakers were meeting with even less clarity and visibility than normal, in all likelihood stuck relying on private-sector indicators as well as older government readings.

Available data was neither positive nor promising

Privately produced data reports have pointed to a U.S. job market that is slowing down both significantly and relatively steadily, especially for white-collar workers in sectors like tech and consulting.

ADP has estimated that private employers shed 32,000 jobs in November, with small businesses cutting a whopping 120,000 positions — the steepest monthly decline in more than two years. Across industries, hiring and quitting rates have also slipped to new cyclical lows. It’s a sign of how cautious and risk-averse both employers and employees have become.

Global bond-market swings complicate the picture

Long-dated government yields have climbed back to levels last seen in 2009, an eye-catching move so close to a possible Fed rate cut. The "bearish" movements suggest investors are reassessing how much more cutting the Fed will deliver from here, especially as inflation readings, though outdated, remain stuck at elevated levels and governments across the globe race to issue more debt to fund swollen deficits.

In the U.S., 10-year and 30-year Treasury yields have both climbed in recent weeks, reflecting concerns about inflation as well as government dysfunction and uncertainty over who will lead the Fed once Powell’s term ends in the spring.

Powell fields questions on AI, labor market weakness

Powell took questions during his afternoon news conference, fielding an unusual number about AI’s effect on the labor market. Powell said some labor-market softness may be the result of AI, and that observers “can’t miss the big announcements of layoffs” with companies citing AI. However, Powell said, if AI were really causing mass job cuts, he would expect it to show in unemployment-filing numbers, which so far hasn’t happened. That’s “a little bit curious,” he admitted, reiterating his longheld view that technologicial revolutions tend to create more jobs than they destroy.

Some analysts pointed to the Fed’s limited ability to address what they see as ailing the labor market. “Rate cuts are unlikely to significantly boost the hiring rate, which is being depressed by overhiring, solid productivity growth, policy uncertainty, a rise in people with multiple jobs, and less immigration,” said Ryan Sweet, chief global economist at Oxford Economics. “Monetary policy can’t solve many of these issues.”

Possibility of further cuts

Asked about divisions within the FOMC — with two members voting against any cut, and Trump appointee Stephen Miran once again voting for a large cut — Powell emphasized the civility of discussions and that members agree on the elevated nature of inflation and the existence of weakness in the job market. The Fed will take a “wait and see” approach to rate cuts in 2026, he said.

Meanwhile, the Fed’s own projections point to just one cut coming next year.

A tense moment for Powell amid unrelenting Trump pressure

If Powell hasn’t been feeling the strain, he’s got a stronger constitution than most. It’s rare for Fed chairs to be under such direct — or any — White House pressure. Even so, cutting interest rates too quickly risks reigniting inflation in an environment in which bond investors already appear uneasy. On the other hand, cutting too slowly could mean letting labor-market problems snowball into 2026, and that’s before analysts consider more esoteric risks.

Finally, hanging over it all is President Donald Trump, who describes rate cuts as a chair’s job duty — a pressure campaign that introduces yet another suite of risks and raises questions about the Fed’s independence at a moment when uncertainty is already at high tide.

Speaking at a White House roundtable following the announcement, Trump criticized the size of the rate reduction: "Interest rates are going down, except with [Powell], not too much. He did a rather small number that could have been doubled, at least doubled."