The US Fed May Be on Pause, but It May Not Be Done Cutting Rates

As was widely expected, the Federal Reserve opted to keep interest rates unchanged at a target range of 3.50%-3.75% during today’s meeting. Altogether, the central bank has cut by 1.75 percentage points since September 2024 (1.00 point in autumn 2024 and 0.75 points in autumn 2025). Prior to that, the federal-funds rate had been quite elevated at a range of 5.25%-5.50% from July 2023 to September 2024. While the federal-funds rate has come down, it’s still significantly above the pre-pandemic (2017-19) average of 1.7%.

The Fed is not expected to be done cutting. This pause will give the central bank time to observe how its more recent cuts affect the economy. According to futures market expectations, the Fed will cut by an additional 0.5 points this year and then hold rates steady in 2027.

Expectations for a Strong US Economy

Expectations for near-term economic growth have improved over the past month or so. Retail sales data came in strong for September and October, while artificial intelligence is expected to fuel massive incremental capital expenditure in 2026, as it did in 2025. The Fed’s official statement upgraded its assessment of the pace of expansion to “solid” from “moderate.” Chair Jerome Powell noted the “outlook for economic activity has improved.”

Yet, notwithstanding the strong picture for economic growth, labor market data has shown much continued weakness. Nonfarm payroll employment shrunk at perhaps a 0.4% annualized pace in the three months ending December (incorporating the anticipated effect of the benchmark revision). The unemployment rate averaged 4.5% in the past three months, up from 4.1% in the first quarter of 2025.

Powell noted that the conventional wisdom is that when data on the labor market and GDP conflict, the labor figures are often proved correct by subsequent data and revisions. Still, it’s possible that a productivity boom, in conjunction with falling labor supply from reduced immigration, is creating an environment wherein job growth is weak even as the economy grows at a solid rate.

As long as the risk of recession remains low, and insofar as further slack doesn’t accumulate in the labor market (i.e. rising unemployment), the Fed won’t be in a hurry to further cut rates. But by year end, we expect the Fed will have cut interest rates two more times.