Fed Delivers Third Rate Cut but Signals Pause
Robert J. Williams
Beatrice Quinn
The Federal Reserve lowered its benchmark interest rate by 25 basis points on Wednesday to a target range of 3.50%–3.75%, its third consecutive quarter‑point cut, but signaled that the easing cycle is likely nearing its end.
The move, delivered in a split 9–3 vote, immediately weakened the US dollar and sparked sharp moves across major forex pairs as traders rapidly repriced the path of US monetary policy into 2026.
What the Fed decided — and why it matters for FX
According to the official FOMC statement, policymakers cut the federal funds rate by 0.25 percentage point “in light of the shift in the balance of risks,” bringing the target range to 3.5%–3.75%.
Key elements of the decision:
– Size of move: 25 bps cut, in line with consensus expectations.
– Vote split: 9 members supported the cut, while three dissented — the most internal disagreement since 2019.
– Forward guidance: The statement kept the Fed firmly data‑dependent, indicating future changes will depend on incoming data and the “evolving outlook.”
– Outlook for 2026: The Fed’s “dot plot” now implies just one rate cut next year, far fewer than markets had priced in ahead of the meeting.
Business Insider notes that the unusually large number of dissents reflected both hawkish officials who preferred to pause, and at least one policymaker who wanted a larger cut, underlining how divided the committee is on the appropriate speed of easing.
Powell: Rates now near neutral, but risks remain
At his press conference, Fed Chair Jerome Powell framed the decision as a cautious adjustment rather than the start of an aggressive easing push.
CNBC reports that Powell emphasized three key points:
– The policy rate is now within a plausible “neutral” range, no longer clearly restrictive.
– Further moves will be “carefully” calibrated based on labor‑market and inflation data, not on a preset path.
– The Fed remains “strongly committed” to its 2% inflation target and to maintaining policy independence despite political pressure.
Powell reiterated that the central bank is balancing slowing job growth and a softer labor market against still‑elevated inflation, complicated by ongoing tariff‑related price pressures and uncertainty around trade policies.
A more divided Fed and what it signals
The three dissents at this meeting mark one of the most fractured FOMCs in recent years.
Business Insider highlights several fault lines:
– Some members argued for holding rates steady, worried that further cuts could re‑ignite inflation in 2026.
– At least one Trump‑appointed policymaker has consistently pushed for larger and faster cuts, citing labor‑market weakness and tariff headwinds.[2]
This internal split matters for traders because:
– It raises uncertainty about how far and how fast the Fed will cut in 2026.
– It increases the sensitivity of FX markets to each data release and each Fed communication, as the balance of power inside the committee can shift.
Market reaction: stocks pop, dollar slips, yields stay uneasy
Markets initially cheered the decision. US equities “popped” on the rate cut, even as investors digested the signal of fewer cuts next year.
At the same time:
– The US dollar weakened against major peers as the immediate effect of a lower policy rate outweighed the hawkish tilt of the 2026 outlook.
– Longer‑term Treasury yields remained elevated, with the 10‑year hovering around 4.20%, reflecting bond‑market concern that inflation risks in 2026 may limit future easing.
That mix — lower short‑term rates, sticky long yields, and a softer dollar — is a classic recipe for heightened forex volatility.
FX impact: dollar under pressure as pairs test key levels
The Fed’s move has immediate and medium‑term consequences for major FX pairs:
– EUR/USD: The euro has been buoyed by a weaker dollar and expectations that the ECB will stay comparatively more hawkish, supporting moves toward key resistance zones.
– GBP/USD: Sterling has pushed higher as dollar selling broadens, despite markets still expecting the Bank of England to cut rates later this month.
– USD/JPY: Dollar‑yen is caught between US easing and a more hawkish Bank of Japan, which is signaling a potential rate hike this month.
The key dynamic for traders is that interest‑rate differentials are likely to compress further if the Fed pauses while other central banks remain cautious on cutting.
Why the Fed is cautious about more cuts
The Fed’s restraint on 2026 cuts is rooted in several structural concerns highlighted in the Business Insider coverage and recent Fed commentary:
– Tariffs and inflation: Companies from Amazon to Walmart have reported feeling the strain of tariffs and are cutting costs and headcount, but these tariffs also prop up prices, complicating disinflation.
– Labor‑market fragility: 2025 has been “a rough year for job seekers,” with more people looking for work than job openings at points during the summer, even though the headline unemployment rate remains relatively low.
– Bond‑market anxiety: The rise in 10‑year yields ahead of the meeting suggests investors are wary that aggressive cuts now could lead to higher inflation and sharper hikes later.
Economist Claudia Sahm told Fortune that “any additional interest rate cuts after today would signal the economy is slipping into danger,” underscoring the Fed’s limited room to ease without spooking markets about a deeper slowdown.
Political pressure and Fed independence
Adding to the complexity is renewed political pressure on the Fed:
– President Donald Trump has repeatedly criticized Powell, calling him “Too Late” for not cutting sooner and at times threatening to remove him.
– Trump ally Kevin Hassett is seen as a leading contender for Fed chair in a future reshuffle and is viewed as favoring more aggressive cuts, which bond markets fear could overshoot and later require a hawkish correction.
Powell, however, has stressed that the Fed is “strongly committed” to independence and bases decisions on data, not politics.
For FX markets, any perception that the Fed might become more politicized or more tolerant of higher inflation could weigh further on the dollar over time.
Market implications: what traders are watching next
Looking ahead, traders are focused on several key themes:
– Path of cuts in 2026: The dot plot’s signal of only one cut next year clashes with earlier market bets on multiple moves.Any surprise in jobs or inflation data could force a repricing across FX and rates.
– Risk sentiment: If incoming data confirms slowing growth without a hard landing, risk assets and higher‑yielding currencies could continue to outperform the dollar.
– Tariffs and corporate earnings: Ongoing tariff pressures and corporate cost‑cutting will shape both inflation and employment, feeding back into Fed policy expectations.
For now, the combination of:
– Lower US policy rates,
– A divided FOMC, and
– Elevated policy and political uncertainty
is likely to keep the dollar on the defensive and FX volatility elevated.
Conclusion: End of the cutting cycle or just a pause?
The Fed’s third consecutive rate cut provides near‑term support for growth and risk assets but comes with a clear message: do not expect a long series of cuts in 2026.
For forex traders, that tension — between immediate easing and a hawkish medium‑term outlook — is likely to drive two‑way volatility across dollar pairs. As labor‑market data, inflation prints, and political developments unfold, expectations for the Fed’s next move will remain one of the most important drivers of global currency markets.
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