Divided Fed cuts rates by 25bps, signals pause

NEW YORK: After three consecutive interest rate cuts, investors now confront an uncertain US monetary policy outlook for the year ahead, clouded by persistent inflation, data gaps, and an impending leadership change at Federal Reserve.

The US Federal Reserve cut interest rates by a quarter-percentage point on Wednesday in an uncommonly divided vote, but signaled it would likely pause further reductions in borrowing costs as officials look for clearer signals about the direction of the job market and inflation that "remains somewhat elevated".

The Fed's projection for a slower easing path contrasts with market expectations for two 0.25% cuts in 2026, which would bring the fed funds rate to about 3.0%. Policymakers see only one cut next year and one in 2027. Wednesday's cut brought the policy rate to a range of 3.50%-3.75%.

The central bank's updated projections showed six policymakers preferring no rate cut this year, and seven anticipating no further cuts in 2026.

How monetary policy evolves from here will hinge on economic data that is still lagging from the impact of the 43-day federal govt shutdown in Oct and Nov. This comes as the US heads into a midterm-election year likely to focus on economic performance, with President Donald Trump urging sharper rate reductions.

"I think the guessing game of what the Fed does next is going to be getting a lot more difficult next year," said Art Hogan, chief market strategist at B Riley Wealth.(This is a Reuters)

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