The US Federal Reserve announced a 25 basis point rate cut as expected by the markets, bringing the interest rates down to 3.75%.

The Federal Reserve also revealed its future interest rate expectations in the dot plot as follows:

Interest rate at the end of 2026: 3.4%

Interest rate at the end of 2027: 3.1%

Interest rate at the end of 2028: 3.1%

Details of the Federal Reserve's statement:

The Federal Reserve Board on Wednesday approved a cut in the key interest rate, meeting market expectations for a "hawkish cut," but indicated a tougher path for further cuts. The Federal Open Market Committee (FOMC) lowered the overnight borrowing rate by a quarter percentage point, bringing it to a range of 3.5% to 3.75%.

Sharp division within the committee and a vote with three dissenting votes

The decision came surrounded by cautionary signs regarding the direction of policy from now on, and it saw three dissenting votes, which had not happened since September 2019.

Result: 9 supporting votes against 3 dissenting votes.

Hardline dissenters (Hawks): Jeffrey Schmid (President of the Kansas City branch) and Austan Goolsbee (President of the Chicago branch), who voted to keep the interest rate unchanged, are concerned about inflation.

Dovish dissenter: Governor Stephen Miran, who voted for a larger cut of half a percentage point, is focused on supporting the labor market.

Note: Miran is leaving the Fed in January, and this is his third consecutive dissenting vote.

The interest rate statement issued after the meeting used similar wording to that used in December 2024, stating that the committee "will conduct a careful assessment of incoming data, evolving expectations, and risk balances, when considering the pace and timing of further adjustments to the target range for the federal funds rate." When this language was used previously, it indicated that the committee had completed cuts for the time being.

"Dot Plot" indicates a pause, and the Fed raises growth expectations

The "Dot Plot" showing individual officials' interest rate forecasts indicated only one cut in 2026 and another cut in 2027, before the federal funds rate reaches a long-term target of around 3%.

2026 Forecasts: These forecasts have not changed since the September update, but seven officials indicated they do not want any cuts next year.

Growth Outlook (GDP): The committee raised its collective GDP forecast for 2026, bolstering the September forecast by half a percentage point to 2.3%.

Inflation Outlook: The committee continues to expect inflation to remain above its 2% target until 2028. The Fed's preferred inflation measure (PCE) remains at 2.8% annually in September.

Bond buybacks and Powell's succession challenges

In addition to the interest rate decision, the Fed announced it would resume purchasing Treasury bonds, following the October meeting announcement to halt the reduction of its balance sheet this month. This move comes amid concerns about pressures in overnight funding markets.

Purchase plan: The central bank will begin buying $40 billion in Treasury bills starting Friday. Purchases are expected to remain "high for a few months" and then potentially "significantly" reduced.

These moves come at a sensitive time for the Fed. Powell is approaching the end of his second term as chair, with only three meetings left before he gives way to President Trump's nominee. Trump indicated he would test his option based on support for lower interest rates, rather than someone committed to the Fed's dual mandate of price stability and full employment.

Market expectations indicate that the likely candidate is Kevin Hassett, chair of the National Economic Council, who is viewed in some financial circles as a Fed chair that would seek to fulfill Trump's wishes.