The Federal Reserve reduced interest rates for the third consecutive session on Wednesday, a move that observers are labeling a “hawkish”, aiming to bolster a weakening job market while indicating an unwillingness to continue lowering them.
TL;DR
- Federal Reserve cut interest rates, signaling caution about future reductions due to inflation concerns.
- The decision was driven by a weakening job market, with slowing hiring and rising unemployment.
- Internal divisions were evident with three dissenting votes on the rate decision.
- This meeting may be Chair Jerome Powell's last before his tenure ends in May 2026.
The action was widely anticipated, though the sentiment wasn't. Authorities accompanied it with more assertive remarks concerning the “extent and timing” of further modifications, wording that, in terminology known to economists as Fed-speak, elevates the threshold for subsequent reductions and emphasizes the committee's apprehension regarding inflation, which the declaration pointed out has “moved up” and “remains somewhat elevated.”
The ruling also highlighted the growing divisions within the Federal Reserve as Chair Jerome Powell's tenure neared its conclusion. Three members cast dissenting votes, each taking a different stance: Stephen Miran advocated for a more substantial 50-basis-point reduction, whereas Austan Goolsbee and Jeffrey Schmid contended that the Fed ought to maintain current interest rates. This is an uncommon gathering where both proponents of tighter monetary policy and those favoring looser policy express disapproval, a situation observers had warned deemed increasingly likely due to intensifying disputes regarding the pace of labor market deceleration and the ongoing need for inflation control.
The December gathering also holds particular significance as it might be the last session where Powell retains his position as Fed chair. His tenure concludes in May, yet President Donald Trump has already pledged to reveal a successor early in 2026, thereby establishing a “shadow chair” prior to Powell's departure.
“Feels like in a way the last Powell Fed meeting,” Bloomberg’s Conor Sen wrote on X. Powell is slated to speak at the conference shortly after the announcement.
Labor market concerns drove the cut
Wednesday’s decision was justified primarily by weakening conditions in the job market. Hiring has slowed markedly since the summer, while unemployment has ticked up and businesses across industries have begun signaling greater caution, even though the layoffs themselves have not yet surged in the official data.
Private-sector signals have flashed more urgency. ADP’s November report showed employers shedding a net 32,000 jobs, the sharpest decline in more than two years. Nearly all of those losses came from small businesses, which cut 120,000 positions, while medium and large firms kept adding workers. Economists view that pattern as a warning sign: Small businesses are the most sensitive to rising costs and weakening demand, and they often pivot first when conditions deteriorate.
The government's JOLTS report, which was long overdue and published on Tuesday, introduced an additional element. In October, job vacancies saw a slight increase but stayed significantly lower than the figures from the previous year. The rate at which employees voluntarily left their jobs dropped to 1.8%, marking the lowest point since the beginning of 2021. Furthermore, the pace of hiring remained stagnant at 3.2%, aligning with descriptions by economists and Powell himself of a “low hire, low fire” labor market. Businesses are not currently terminating employees in large numbers, but they are also not increasing their workforce. This situation is sufficient to cause concern among economists.
“Low hiring on its own is bad news,” top economist and Fed-watcher Claudia Sahm told Coins2Day. “It puts upward pressure on unemployment, and that’s the dynamic the Fed is trying to get ahead of.”
A deliberately cautious message
The Federal Reserve aimed to reconcile worries about the job market with the political delicacy of reducing interest rates while inflation remains high.
Federal Reserve policymakers will seek greater adaptability rather than indicating that rate reductions are set to continue indefinitely. Joblessness is still minimal compared to historical benchmarks; spending by affluent families has proven robust; and investment arenas have experienced significant gains anticipating a more accommodating monetary stance in the coming year. Powell has cautioned markets overread his intentions throughout the current year.
Still, Powell cannot declare victory or signal a pause with confidence. The November jobs report arrives just days after the meeting, and he will want flexibility in case that comes out worse than expected, so he doesn’t look “flat-footed,” Sahm said.
The limits of preemption
For the Fed, the goal is to smooth out the cycle—to cut early enough to prevent a deeper downturn without abandoning the fight against inflation, still sticky at 2.8%, higher than the Fed’s preferred rate of 2%. Sahm, who helped design the Fed’s framework for interpreting labor-market inflection points, argues timing is crucial.
“If the Fed waits to cut until they see clear deterioration, they’ve waited too long,” she said. Initial jobless claims remain low, she noted, but they are not predictive. As a lagging indicator, they tend to spike only after a recession has begun.
The Federal Reserve's current difficulty lies in balancing these conflicting dangers as financial markets, the White House, and Congress press for definite guidance that the central bank is presently unable to offer.
If the Fed has to continue easing into early 2026, Sahm argues, it will not be a bullish signal.
“If they end up doing a lot more cuts,” she said, “then something has gone wrong.”
