The Federal Reserve lowered interest rates by a quarter of a percentage point Wednesday. But revealed a huge disagreement on the course for 2026.
The decision cut interest rates for a third meeting in a row, moving rates to a new range of 3.5% to 3.75%. It marked the fourth straight vote that was not supported by all members of the 12-person Federal Open Market Committee.
Voting for the 25 basis point cut were Jerome Powell, chair; John Williams, vice chair; Michael Barr; Michelle Bowman; Susan Collins; Lisa Cook; Philip Jefferson; Alberto Musalem; and Christopher Waller. Voting against this action were Stephen Miran, who preferred to lower the target range for the federal funds rate by 1/2 percentage point at this meeting; and Austan Goolsbee and Jeffrey Schmid, who preferred no change to the target range at this meeting.
The new target Fed Funds rate of 3.5% to 3.75% is, of course, a nominal rate. With the Fed’s preferred inflation measure, the Personal Consumption Expenditures index, running at 2.8% in September, the last monthly data, the current nominal target rate is barely above 0% at 0.7% to 0.95%. Yep, we’re back to the days of 1% interest rates.
Leading up to the meeting, Fed watchers expected perhaps more committee members to vote for keeping rates steady. “Speeches over the last month from Susan Collins and Alberto Musalem suggest that they will join Jeffrey Schmid, who dissented in October, in voting to maintain the current target range for the funds rate,” noted Samuel Tombs, chief U.S. economist from Pantheon Macroeconomics, in a note this morning. With only Schmid and Goolsbee dissenting in the upward direction, Powell looks to have convinced the others to vote for a cut.
The economic projections released today, the Dot Plot, show remarkable disagreement about the direction oF Fed policy and the economy in 2026. The consensus median view shows Fed officials believe the unemployment rate will hit 4.5% at the end of the year, up from a forecast of 4.4% in September.
Fed officials have become slightly more optimistic about the economic outlook since their September meeting. The consensus view expects gross domestic product, adjusted for inflation, to grow by 2.3% in 2026, up from the 1.8% rate they expected in September. And they expect inflation to be mildly cooler next year as well, although they still think it will stay above their long-run 2% target.
But that median view conceals a striking range of disagreement about what the Fed should do next year. The median “dot” on the dot plot calls for one quarter-point cut next year, but only four officials actually expect that outcome. Seven officials indicated they don’t think they should cut rates at all next year. Four expect to cut twice. And four more expect even more cuts, including one official–presumably new member Stephen Miran–who expects the equivalent of six quarter-point cuts next year. Six quarter point cuts, 1.5 percentage points, would take the Fed Funds rate down to a range of 2% to 2.25%, well below the current inflation rate.
That outlier position wouldn’t matter very much except that it comes from President Donald Trump’s most recent appointee to the Fed and probably represents something close to the views of President Trump’s next nominee in January. That nominee is likely to be the next Fed chair when Powell’s term ends in May.
