The Federal Reserve on Wednesday cut its benchmark interest rate by 0.25 percentage points, bringing the federal funds rate to its lowest level in more than three years.

The reduction lowers the federal funds rate — what banks charge each other for short-term loans — to between 3.5% and 3.75%, down from its prior range of 3.75% to 4%. The Fed's decision marks the third consecutive rate cut since September, lowering the federal funds rate by a total of 0.75 percentage points this year.

Despite the lack of key government economic data because of the recent U.S. government shutdown, the Fed has been closely monitoring the slowdown in monthly job growth as well as rising inflation. Figures from ADP, which tracks private payrolls, showed that employers shed 32,000 jobs in November, a signal of continuing headwinds in the labor market.

Fed hints at one rate cut in 2026

But in announcing the decision, the Federal Reserve signaled that it may want to see more economic evidence to support additional rate cuts in 2026. In quarterly economic projections issued along with their latest statement, Fed officials signaled they expect to lower rates just once next year.

"In considering the extent and timing of additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook and the balance of risks," the Federal Open Market Committee, or FOMC, said in its statement. 

Speaking about the decision in a press conference on Wednesday afternoon, Fed Chair Jerome Powell said the central bank is "well positioned to wait to see how the economy evolves" before deciding on another cut.

"We're going to get a great deal of data between now and the January meeting — the data we get will factor into our thinking," Powell said, referring to the delayed November inflation and job reports that will be issued later this month. "We're well-positioned to wait and see."

The Federal Reserve also issued new U.S. inflation, economic growth and unemployment projections for 2026, forecasting that inflation will cool slightly next year while unemployment will remain unchanged from its current level of 4.4%. 

Fed officials forecast that Personal Consumption Expenditures, the Fed's favored inflation gauge, will cool to 2.4% next year, down from its median estimate of 2.9% in 2025. The nation's gross domestic product could pick up to 2.3% in 2026, an acceleration from the Fed's September forecast of 1.8%.

Ryan Sweet, chief global economist at Oxford Economics, said the latest Fed guidance sets it up for what he described in a note to investors as an "extended pause" in cutting rates.

"The Fed isn't going to be able to help the labor market because of what ails it," he added. "Rate cuts are unlikely to significantly boost the hiring rate, which is being depressed by overhiring, solid productivity growth, policy uncertainty, a rise in people with multiple jobs and less immigration. Monetary policy can't solve many of these issues."

The move lowers the federal funds rate to its lowest level since early November 2022, when policymakers lifted the range to 3.75% to 4%. At that time, the central bank was boosting rates — its most potent tool for curbing inflation — as inflation surged during the pandemic.

By cutting rates, the Fed is acting to spur hiring by making credit cheaper, allowing businesses to expand and hire at a lower cost. Consumers, meanwhile, tend to spend more when financing is less expensive, giving the broader economy an extra lift.

FOMC dissents

Not all members of the FOMC, the Fed's rate-setting panel, agreed with the move to cut by a quarter point. While Fed Chair Jerome Powell was joined by eight other committee members in voting in favor of the reduction, three members dissented, the Fed said. That represents the most dissents in six years and is a sign of divisions on a committee that traditionally works by consensus. 

FOMC members Austan Goolsbee and Jeffrey Schmid voted to maintain the previous range, while Stephen Miran voted in favor of a 0.5 percentage-point cut.

At the same time, the Fed is moving toward a leadership shift next year, with Powell set to end his term as chair in May 2026 and President Trump preparing to nominate his replacement.

"[T]he outlook from the Powell-led FOMC bears less than usual on future Fed policy decisions given the imminent change in leadership," Jeff Schulze, head of economic and market strategy at ClearBridge Investments, said in an email.

Asked what his goals are during the last months of his term as chair, Powell said he's focused on the U.S. economy.

"I want to turn over this job to whoever replaces me with the economy in really good shape," he said. "All my efforts are to get to that place."