The Fed cuts rates for the third time, but cautions. Powell: “We are in a good position to wait”

The Federal Reserve has cut interest rates for the third consecutive meeting, bringing the federal funds rate to 3.5%–3.75%, the lowest level in the past three years. The move aims to counter a slowdown in the labor market that has been sharper than expected, but it may represent only a temporary pause in the monetary easing cycle.

The decision, approved by a divided 9–3 vote, is the first in six years to register three dissents. Two officials judged the cut unjustified, while a third would have preferred a more aggressive half-point move. The vote signals how split the committee is regarding the future of monetary policy. “We are in a good position to wait and see how the economy evolves,” said Chair Jerome Powell, suggesting that the Fed will now raise the bar for further reductions, especially in the absence of clearer labor-market data.

According to Powell, after employment data revisions delayed by the autumn shutdown, job growth may have been slightly negative since April. Additional signs of weakening - such as rising jobless claims, more layoffs, and a gradual increase in the unemployment rate - would represent a “very uncomfortable constellation” for the core of the committee, which is already divided between hawks and doves.

Wall Street welcomed the decision and, above all, Powell’s tone, which was less hawkish than expected. The Dow Jones gained 1%, its best performance on a Fed decision day since 2023; the S&P 500 and Nasdaq rose 0.7% and 0.3%, respectively. On the long-term interest-rate front, however, relief was more muted: the 10-year Treasury yield climbed to 4.163%, limiting the benefit for mortgages and investments.

The internal split within the Federal Reserve is stark: some, focused on inflation risks, fear the economy is stronger than it appears and that rates that are too low could ease pressure on prices; others point to a weak labor market and a sluggish housing sector, arguing that risks are unbalanced. A rapidly rising unemployment rate would require much more drastic action. Powell now finds himself leading a Fed less unified than ever, while the Tycoon prepares to choose his successor.

The new quarterly projections show that most officials do not expect more than one additional cut next year, confirming the September outlook. A significant minority even sees rates higher than the pre-cut level: for some, the easing cycle may have already gone too far. The Fed will need to closely monitor upcoming data, particularly the November consumer price index. Some companies may, in fact, pass on tariff-related costs to consumers at the start of 2026.

The central bank moves in a context reminiscent, in some ways, of the dilemmas of the 1970s: inflation still too high and a cooling labor market. Powell downplays the disagreements, calling them a natural consequence of the Fed’s dual mandate - price stability and maximum employment. But with each new data point, the margin for maneuver narrows. And the next month of readings will be decisive for understanding whether the Fed can afford to wait… or will be forced to act again.

Andrea Pelucchi