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Below the Views on FOMC meeting: Rate cut despite dissent by David Kohl, Chief Economist, Julius Baer

The US Federal Reserve (Fed) cut interest rates despite intense debate on whether rate cuts are appropriate with inflation still elevated. The number of dissenters increased to three increase the uncertainty regarding further interest rate cuts. The FOMC economic projections turned more optimistic about growth next year and slightly lower inflation in the years to come. The dovish opening statement surprised markets. We expect the Fed to continue cutting rates in 2026 despite ongoing debates on whether additional rate cuts are appropriate.

The Fed has cut the Fed funds target rate, as expected, by 25 basis points to 3.50%–3.75% at its last FOMC meeting in December. Stephen Miran, President Trump’s former economic advisor, who joined the Fed board on a temporary basis until the end of the year, was once again demanding a larger rate reduction of 50 basis points. At the same time, two FOMC members argued against cutting rates at this FOMC meeting, putting more weight on the fact that US inflation remains elevated and closer to 3% than to 2%, the Fed inflation target. The growing division within the FOMC on the topic of how much weight to put on elevated inflation and how to take into account the softening labour market increases the uncertainty regarding future policy. That said, the feared hawkish rate cut did not materialise, with the opening statement having a rather dovish tone and the update of the FOMC economic projection seeing slightly higher chances that inflation will move closer to 2% in the coming years. The majority of FOMC members still see one more rate cut next year as appropriate, but the division remains considerable. We continue to expect two more rate cuts by the Fed in 2026 on the back of a weakening labour market and no acceleration of inflation.

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