Fed cuts interest rates by 25bps, says it plans only one cut in 2026

As the press conference wound down, Jerome Powell was asked what he wants his legacy to be. He kept it short.

“I really want to turn this job over to whoever replaces me with the economy in really good shape,” he said. That means inflation at 2%, and a strong labor market, nothing more, nothing less. “That’s what I want.”

Pressed on whether he plans to remain on the Fed’s board after stepping down as chair, Powell gave no opening. “I’m focused on my remaining time as chair,” he said. “I haven’t got anything new on that to tell you.”

But politics is clearly creeping in.

Donald Trump told reporters last week that he’ll name a new Fed chair early next year, and made it clear the top requirement will be someone who supports cutting rates right away.

In a Tuesday interview with Politico, Trump had said that a more aggressive cut than today’s 25bps move would have been “better.”

Powell also refused to touch the Supreme Court case involving Fed Governor Lisa Cook, where Trump is attempting to have her removed, a move with no precedent in U.S. history.

The court will hear arguments on January 21, and the outcome could reshape the boundaries of Fed independence for the first time in decades.

So far, Powell is staying quiet on all of it. But with elections, appointments, and legal fights on the horizon, the final months of his term are already shaping up to be anything but quiet.

Markets roared into the close Wednesday as investors fully embraced the Fed’s third rate cut, sending major indices toward fresh records.

The Dow Jones Industrial Average surged 587 points, up 1.2%, while the S&P 500 jumped 0.8% to 6,898, officially pushing past its October high. The Nasdaq Composite added 0.5%, continuing its slow but steady climb.

But the day’s biggest fireworks came from small caps.

The Russell 2000 index soared 1.5%, hitting a new all-time high as traders piled into smaller names that typically benefit the most from lower borrowing costs.

If the index finishes above $2,531.16, it will log a record close, capping a breakout stretch that’s seen it rally almost 15% year-to-date. Still, it’s running slightly behind the S&P 500, which is up 17.2% in 2025 so far.

In commodities, Bitcoin stayed flat at $93,000, holding its ground after last week’s gains. Gold inched up 0.2% to $4,215.10/oz, while silver climbed 0.4%. Platinum and palladium both slipped.

Meanwhile, the Dollar Spot Index dropped 0.3%, as traders rotated out of the greenback and into risk.

Jerome Powell was asked whether tariffs are still pushing prices higher, and if that pressure might ease soon. His answer: not right away, but it’s coming.

“It’ll take quite a while for an individual tariff to take its full effect,” he said, before adding that if no new tariffs are introduced, goods inflation could peak in Q1 of next year.

That’s not a firm forecast, though. “We haven’t been able to predict this with any precision. No one is,” Powell admitted. Still, he said any inflation impact from tariffs going forward should be small, “a couple tenths or even less than that.”

On broader inflation worries, Powell acknowledged what’s been hitting Americans hardest. “We have a network of contacts in the U.S. economy,” he said. “We hear loud and clear how people are experiencing really high costs.”

But Powell clarified that much of that pain isn’t coming from recent inflation, it’s the long shadow of 2022 and 2023, when inflation was running hot. “A lot of that is not the current rate of inflation,” he said. “It’s embedded higher costs from the earlier spikes.”

He also addressed the political backdrop, without naming names.

While prices are still up 3% year-over-year through September, Powell said the Fed’s top priority is to bring inflation back to 2%, while making sure jobs and wages stay strong enough that people can feel “economically healthy again.”

Jerome Powell addressed the three dissents in today’s rate decision, acknowledging just how rare this kind of division has become. But he said despite the split, there’s agreement on the basics.

“Everyone around the table agrees inflation is still too high, and we want it to come down,” Powell said. “And everyone agrees the labor market has softened, with more risks emerging on that front.”

What’s different now, he explained, is how those risks get prioritized. That’s the dividing line. “Where the difference is, how do you weight those risks?” he said.

Powell called it “very unusual” to have such persistent tension between inflation and employment goals, the core pillars of the Fed’s mandate.

But he pushed back on the idea that things are breaking down inside the committee. “The discussions we have are as good as any we’ve had in my 14 years at the Fed,” he said. “They’re thoughtful, respectful. You just have people who hold strong views.”

Today’s cut passed with 9 out of 12 members backing it, what Powell described as “fairly broad support.” Still, he admitted this wasn’t the typical setup, where consensus leads the way.

“It’s not like the normal situation,” he said. “Not everyone agrees on the direction, or what to do next.”

Taking the first round of questions, Jerome Powell addressed the new phrase in the statement, “considering the extent and timing of additional adjustments,” and confirmed what markets suspected: the Fed’s in no rush now. “That new language points out that we’ll carefully evaluate the incoming data,” he said.

Powell also laid out why the Fed feels it can pause. After cutting 75 basis points since September, and 175 since last year, he said the Fed funds rate is now within the neutral zone, meaning it’s no longer actively holding the economy back. “We are well positioned to wait and see how the economy evolves,” Powell told reporters.

Asked about the surprisingly optimistic tone in the Fed’s growth outlook for 2026, Powell pointed to resilient consumer spending as a key support. September saw a modest uptick, capping three strong months of gains. But he didn’t stop there.

He also flagged something new: AI-driven business investment. “Spending on data centers and related to AI has been holding up business investment,” Powell said, calling it a real factor in current GDP estimates. With AI infrastructure buildouts accelerating, that’s now part of the Fed’s economic baseline.

And don’t forget Washington. “Fiscal policy is going to be supportive,” he added, suggesting the federal government is expected to keep pumping demand into the economy.

Between steady consumers, ongoing AI capex, and loose fiscal conditions, Powell said the Fed expects “solid growth” next year, even if rates stay exactly where they are.

The Dow Jones Industrial Average jumped 212 points midday Wednesday, up about 0.5%, as traders placed final bets on the Federal Reserve’s rate cut and what comes after.

The S&P 500 ticked 0.1% higher, still hovering just under its October 28 record, while the Nasdaq Composite slipped 0.2%, weighed down by a more than 2% drop in Microsoft.

Big banks were on the move. JPMorgan Chase led financials higher, with traders betting a rate cut will juice the economy and unlock credit growth.

GE Vernova shares also climbed after the industrial giant doubled its dividend, drawing in fresh investor interest across the industrials sector.

That’s a big shift from Tuesday, when markets basically went nowhere, the S&P 500 and Dow both closed lower, while the Nasdaq ended just barely in the green.

But memories of October still linger. Back then, Powell cut rates, but cautioned against assuming more would follow. That sent markets into a funk for most of November, until a few Fed voices started hinting at one more cut.

That brought stocks back to life. Now, the S&P is sitting just shy of its highs, with Wall Street watching to see if Powell opens the door wider, or slams it shut.

The Federal Reserve is expected to cut interest rates for the third time this year when it wraps up its two-day meeting on Wednesday, but the message from Jerome Powell is unlikely to feel celebratory.

The central bank is leaning toward a 25-basis-point cut, bringing the federal funds rate down to a target range of 3.5% to 3.75%, according to market consensus.

But this meeting is anything but straightforward.

Inside the Federal Open Market Committee, there’s a split. Some policymakers want to keep easing, worried that a weakening job market could drag the economy down.

Others are growing anxious that more cuts might let inflation slip out of their grip again. That’s why the term making the rounds on trading desks is a “hawkish cut,” one where the Fed delivers a cut but warns it could be the last one for a while.

David Mericle, an economist at Goldman Sachs, said Powell is likely to highlight just how high the bar has become for any further rate reductions.

Mericle thinks Powell will spend time explaining why some Fed members didn’t agree with Wednesday’s move, just like in October, when two members voted “no.”

That number could go up.

According to Bill English, a former top Fed staffer, this is shaping up to be one of the more complicated meetings of the year.

“It’s a tough meeting,” he said, adding that deep philosophical splits on the committee are likely to show up again, especially in the dot plot, the anonymous chart where each of the 19 participants signals where they think rates are headed.

Economic data hasn’t made things easier. Even though the government shutdown has now been resolved, there’s been a lack of fresh labor market stats.

What’s out there doesn’t look great: hiring dropped by 218,000 in October, while layoffs ticked up by 73,000, according to the Bureau of Labor Statistics.

Meanwhile, the Fed’s preferred inflation measure, core PCE, came in at 2.8% in September. That’s lower than expected, but still way above the Fed’s 2% target.