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  • Federal Reserve cuts key rate, sees healthier economy next year

    WASHINGTON (AP) — The Federal Reserve reduced its key interest rate by a quarter-point for the third time in a row Wednesday but signaled that it may leave rates unchanged in the coming months.

    The cut decreased the Fed’s rate to about 3.6%, the lowest it has been in nearly three years. Lower rates from the Fed can bring down borrowing costs for mortgages, auto loans, and credit cards over time, though market forces can also affect those rates.

    Chair Jerome Powell suggested at a news conference that after six rate cuts in the past two years, the central bank can step back and see how hiring and inflation develop. In a set of quarterly economic projections, Fed officials signaled they expect to lower rates just once next year.

    Fed officials “will carefully evaluate the incoming data,” Powell said, adding that the Fed is “well positioned to wait to see how the economy evolves.”

    The chair also said that the Fed’s key rate was close to a level that neither restricts nor stimulates the economy, a significant shift from earlier this year, when he described the rate as high enough to slow the economy and quell inflation. With rates closer to a more neutral level, the bar for further rate cuts is likely higher that it was this fall.

    “We believe the labor market will have to noticeably weaken to warrant another rate cut soon,” Ryan Sweet, global chief economist at Oxford Economics, said.

    Three Fed officials dissented from the move, the most dissents in six years and a sign of deep divisions on a committee that traditionally works by consensus. Two officials voted to keep the Fed’s rate unchanged: Jeffrey Schmid, president of the Kansas City Fed, and Austan Goolsbee, president of the Chicago Fed. Stephen Miran, whom Trump appointed in September, voted for a half point cut.

    December’s meeting could usher in a more contentious period for the Fed. Officials are split between those who support reducing rates to bolster hiring and those who’d prefer to keep rates unchanged because inflation remains above the central bank’s 2% target. Unless inflation shows clear signs of coming fully under control, or unemployment worsens, those divisions will likely remain.

    “What you see is some people feel we should stop here and we’re in the right place and should wait, and some people think we should cut more next year,” Powell said.

    A stark sign of the Fed’s divisions was the wide range of cuts that the 19 members of the Fed’s rate-setting committee penciled in for 2026. Seven projected no cuts next year, while eight forecast that the central bank would implement two or more reductions. Four supported just one. Only 12 out of 19 members vote on rate decisions.

    President Donald Trump on Wednesday criticized the cut as too small, and said he would have preferred “at least double.” Trump could name a new Fed chair as soon as later this month to replace Powell when his term ends in May. Trump’s new chair is likely to push for sharper rate cuts than many officials will support.

    Stocks jumped in response to the Fed’s move, in part because some Wall Street investors expected Powell to be more forceful in shutting down the possibility of future cuts. The broad S&P 500 stock index rose 0.7% and closed near an all-time high reached in October.

    Powell was also optimistic about the economy’s growth next year, and said that consumer spending remains resilient while companies are still investing in artificial intelligence infrastructure. He also suggested growing worker efficiency could contribute to faster growth without more inflation.

    Still, Powell said the committee reduced borrowing costs out of concern that the job market is even weaker than it appears. While government data shows that the economy has added just 40,000 jobs a month since April, Powell said that figure could be revised lower by as much as 60,000, which would mean employers have actually been shedding an average of 20,000 jobs a month since the spring.

    “It’s a labor market that seems to have significant downside risks,” Powell told reporters. “People care about that. That’s their jobs.”

    The Fed met against the backdrop of elevated inflation that has frustrated many Americans, with prices higher for groceries, rents, and utilities. Consumer prices have jumped 25% in the five years since COVID.

    “We hear loud and clear how people are experiencing really high costs,” Powell said Wednesday. “A lot of that isn’t the current rate of inflation, a lot of that is e mbedded high costs due to higher inflations in 2022-2023.”

    Powell said inflation could move higher early next year, as more companies pass tariff costs to consumers as they reset prices to start the year. Inflation should decline after that, he added, but it’s not guaranteed.

    “We just came off an experience where inflation turned out to be much more persistent than anyone expected,” he said, referring to the spike in 2022. “Is that going to happen now? That’s the risk.”

    The Fed’s policy meeting took place as the Trump administration moves toward picking a new Fed chair to replace Powell when his term finishes in May. Trump’s nominee is likely to push for sharper rate cuts than many officials may support.

    Trump has hinted that he will likely pick Kevin Hassett, his top economic adviser. But on Wednesday, Trump said he would meet with Kevin Warsh, a former Fed governor who has also been on the short list to replace Powell.

    Trump added that he wants someone who will lower interest rates. “Our rates should be the lowest rates in the world,” he said.

    A government report last week showed that overall and core prices rose 2.8% in September from a year earlier, according to the Fed’s preferred measure. That is far below the spikes in inflation three years ago but still painful for many households after the big run-up since 2020.

    Adding to the Fed’s challenges, job gains have slowed sharply this year and the unemployment rate has risen for three straight months to 4.4%. While that is still a low rate historically, it is the highest in four years. Layoffs are also muted, so far, as part of what many economists call a “low hire, low fire” job market.

    The Fed typically keeps its key rate elevated to combat inflation, while it often reduces borrowing costs when unemployment worsens to spur more spending and hiring.

    Powell will preside over only three more Fed meetings before he steps down. On Wednesday, he was asked about his legacy.

    “I really want to turn this job over to whoever replaces me with the economy in really good shape,” he said. “I want inflation to be under control, coming back down to 2%, and I want the labor market to be strong.”

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    Associated Press Writers Collin Binkley and Alex Veiga in Los Angeles contributed to this report.

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  • Sharp disagreements over economy threaten Federal Reserve interest rate cut

    WASHINGTON (AP) — What was once seen as a near-certain cut in interest rates next month now looks more like a coin flip as Federal Reserve officials sharply disagree over the economy’s health and whether stubborn inflation or weak hiring represent a bigger threat.

    In several speeches in the past week, some policymakers have registered greater concern over persistent inflation in an echo of the “affordability” concerns that played a large role in elections earlier this month.

    At the same time, another camp is much more concerned about meager hiring and the threat that the “low-hire, low-fire“ job market could worsen into one where layoffs become more widespread.

    The turmoil on the Fed’s 19-member interest-rate setting committee reflects a deeply uncertain economic outlook brought about by multiple factors, including tariffs, artificial intelligence, and changes in immigration and tax policies.

    “It’s reflective of a ton of uncertainty,” said Luke Tilley, chief economist at M&T Bank. “It’s not surprising at all that there’s a wide divergence of opinions.”

    Fewer rate cuts by the Fed could leave borrowing costs for homes and cars elevated. More expensive mortgages and auto loans contribute to the widespread view, according to polls, that the cost of living is too high.

    Some Fed watchers say that an unusually high number of dissents are possible at the December 9-10 meeting, regardless of whether the central bank reduces rates or not. Krishna Guha, an analyst at Evercore ISI, said a decision to cut could lead to as many as four or five dissents, while a decision to keep rates unchanged could produce three.

    Four dissenting votes would be highly unusual, given the Fed’s history of seeking consensus. The last time four officials dissented was in 1992, under then-Chair Alan Greenspan.

    Fed governor Christopher Waller on Monday noted that critics of the Fed often accuse it of “group think,” since many of its decisions are made unanimously.

    “People who are accusing us of this, get ready,” Waller said Monday in remarks in London. “You might see the least group think you’ve seen … in a long time.”

    The differences have been exacerbated by the government shutdown’s interruption of economic data, a particular challenge for a Fed that Chair Jerome Powell has often described as “data dependent.” The government’s last jobs report was for August, and inflation for September.

    September jobs data will finally be published Thursday, and are expected to show a small gain of 50,000 jobs that month and an unchanged unemployment rate at a still-low 4.3%.

    For now, Wall Street investors put the odds of a December rate cut at 50-50, according to CME Fedwatch, down sharply from nearly 94% a month ago. The decline has contributed to the stock market’s drops this week.

    After cutting their key rate in September for the first time this year, Fed policymakers signaled they expected to cut twice more, in October and December.

    But after implementing a second reduction Oct. 29, Powell poured cold water on the prospects of another cut, describing it as “not a foregone conclusion — far from it.”

    And speeches last week by a raft of regional Fed officials pushed the market odds of a December cut even lower. Susan Collins, president of the Federal Reserve Bank of Boston, said, “in all of my conversations with contacts across New England, I hear concerns about elevated prices.”

    Collins said that keeping the Fed’s key rate at its current level of about 3.9% would help bring inflation down. The economy “has been holding up quite well” even with interest rates where they are, she added.

    Several other regional presidents voiced similar concerns, including Raphael Bostic of the Atlanta Fed, Alberto Musalem of the St. Louis Fed, and Jeffrey Schmid at the Kansas City Fed. Musalem, Collins, and Schmid are among the 12 officials who vote on policy this year. Schmid dissented in October in favor of keeping rates unchanged.

    “When I talk to contacts in my district, I hear continued concern over the pace of price increases,” Schmid said Friday. “Some of this has to do with the effect of tariffs on input prices, but it is not just tariffs — or even primarily tariffs — that has people worried. I hear concerns about rising health care costs and insurance premiums, and I hear a lot about electricity.”

    On Monday, however, Waller argued that sluggish hiring is a bigger concern, and renewed his call for a rate cut next month.

    “The labor market is still weak and near stall speed,” he said. “Inflation through September continued to show relatively small effects from tariffs and support the hypothesis that tariffs … are not a persistent source of inflation.”

    Waller also dismissed the concern — voiced by Schmid and others — that the Fed should keep rates elevated because inflation has topped the Fed’s 2% target for five years. So far that hasn’t led the public to worry that inflation will stay elevated for an extended period, Waller noted.

    “You can’t just sort of say it’s been above target for five years, so I’m not going to cut,” he added. “You got to give us better answers than that.”

    There could be consensus for an interest rate cut if, say, new data for October and November show the economy shedding jobs, according to Esther George, the former president of the Kansas City Fed.

    It’s also worth noting that many economists had expected multiple dissents in September, but instead only Stephen Miran, a governor appointed that month by President Donald Trump, voted against the rate cut decision, in favor of an even bigger reduction.

    “Registering a dissent is a hard decision, and I think you’re going to find people that are speaking today that wouldn’t follow through with a vote in that direction,” she said. “I think you’re going to find enough consensus, whichever way they go.”

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  • Federal Reserve cuts key rate yet Powell says future reductions are not locked in

    WASHINGTON (AP) — The Federal Reserve cut its key interest rate Wednesday for a second time this year as it seeks to shore up economic growth and hiring, even as inflation stays elevated.

    But Fed Chair Jerome Powell also cautioned that further rate cuts weren’t guaranteed, citing the government shutdown’s interruption of economic reports and sharp divisions among 19 Fed officials who participate in the central bank’s interest-rate deliberations.

    Speaking to reporters after the Fed announced its rate decision, Powell said there were “strongly differing views about how to proceed in December” at its next meeting and a further reduction in the benchmark rate is not “a foregone conclusion — far from it.”

    The rate cut — a quarter of a point — brings the Fed’s key rate down to about 3.9%, from about 4.1%. The central bank had cranked its rate to roughly 5.3% in 2023 and 2024 to combat the biggest inflation spike in four decades before implementing three cuts last year. Lower rates could, over time, reduce borrowing costs for mortgages, auto loans, and credit cards, as well as for business loans.

    The move comes amid a fraught time for the central bank, with hiring sluggish and yet inflation stuck above the Fed’s 2% target. Compounding its challenges, the central bank is navigating without the economic signposts it typically relies on from the government, including monthly reports on jobs, inflation, and consumer spending, which have been suspended because of the government shutdown.

    Financial markets largely expected another rate reduction in December, and stock prices dropped after Powell’s comments, with the S&P 500 nearly unchanged and the Dow Jones Industrial Average closing slightly lower.

    “Powell poured cold water on the idea that the Fed was on autopilot for a December cut,” said Gennadiy Goldberg, head of U.S. rates strategy at TD Securities. “Instead, they’ll have to wait for economic data to confirm that a rate cut is actually needed.”

    Powell was asked about the impact of the government shutdown, which began on Oct. 1 and has interrupted the distribution of economic data. Powell said the Fed does have access to some data that give it “a picture of what’s going on.” He added that, “If there were a significant or material change in the economy, one way or another, I think we’d pick that up through this.”

    But the Fed chair did acknowledge that the limited data could cause officials to proceed more cautiously heading into its next meeting in mid-December.

    “There’s a possibility that it would make sense to be more cautious about moving (on rates). I’m not committing to that, I’m just saying it’s certainly a possibility that you would say ‘we really can’t see, so let’s slow down.’”

    The Fed typically raises its short term rate to combat inflation, while it cuts rates to encourage borrowing and spending and shore up hiring. Right now it sees risks of both slowing hiring and rising inflation, so it is reducing borrowing costs to support the job market, while still keeping rates high enough to avoid stimulating the economy so much that it worsens inflation.

    Yet Powell suggested the Fed increasingly sees inflation as less of a threat. He noted that excluding the impact of President Donald Trump’s tariffs, inflation is “not so far from our 2% goal.” Inflation has slowed in apartment rents and for many services, such as car insurance. A report released last week showed that inflation remains elevated but isn’t accelerating.

    The government recalled employees to produce the report, despite the shutdown, because it was used to calculate the cost of living adjustment for Social Security.

    At the same time, the economy could be rebounding from a sluggish first half, which could improve job growth in the coming months, Powell said. That would make rate cuts less necessary.

    “For some part of the committee, it’s time to maybe take a step back and see if whether there really are downside risks to the labor market,” Powell said. “Or see whether in fact that the stronger growth that we’re seeing is real.”

    Two of the 12 officials who vote on the Fed’s rate decisions dissented Wednesday, but in different directions. Jeffrey Schmid, President of the Federal Reserve Bank of Kansas City, voted against the move because he preferred no change to the Fed’s rate. Schmid has previously expressed concern that inflation remains too high.

    Fed governor Stephen Miran dissented for the second straight meeting in favor of a half-point cut. Miran was appointed by President Donald Trump just before the central bank’s last meeting in September.

    Trump has repeatedly attacked Powell for not reducing borrowing costs more quickly. In South Korea early Wednesday he repeated his criticisms of the Fed chair.

    “He’s out of there in another couple of months,” Trump said. Powell’s term ends in May. On Monday, Treasury Secretary Scott Bessent confirmed the administration is considering five people to replace Powell, and will decide by the end of this year.

    The Fed also said Wednesday that it would stop reducing the size of its massive securities holdings, which it accumulated during the pandemic and after the 2008-2009 Great Recession. The change, to take effect Dec. 1, could over time slightly reduce longer-term interest rates on things like mortgages but won’t have much overall impact on consumer borrowing costs.

    Without government data, the economy is harder to track, Powell said. September’s jobs report, scheduled to be released three weeks ago, is still postponed. This month’s hiring figures, to be released Nov. 7, will likely be delayed and may be less comprehensive when finally released. And the White House said last week that October’s inflation report may never be issued at all.

    Before the government shutdown cut off the flow of data, monthly hiring gains had weakened to an average of just 29,000 a month for the previous three months, according to the Labor Department’s data. The unemployment rate ticked up to a still-low 4.3% in August from 4.2% in July.

    More recently, several large corporations have announced sweeping layoffs, including UPS, Amazon, and Target, which threatens to boost the unemployment rate if it continues. Powell said the Fed is watching the layoff announcements “very carefully.”

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    Associated Press Writer Alex Veiga in Los Angeles contributed to this report.

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