The Federal Reserve (Fed, the US central bank) did as expected and reduced its base interest rate by 0.25 percentage points, to a range between 3.5% and 3.75%. The internal division at the US central bank has deepened, with two members of the Open Market Committee, which decides rates, defending the hold and another, Stephen Miran, appointed by President Donald Trump, in favor of a larger cut of 0.5 percentage points. The median of committee members’ projections points to just one additional interest rate cut in 2026, signaling a long pause in cuts, although there is a sharp divergence in expectations. Eight committee members expect an interest rate of 3% or less, three expect another interest rate increase, four expect no further decrease and four favor a reduction of 0.25 points. Such a distribution does not occur in Brazilian British Columbia: Selic was unanimously maintained at 15%.
Even though the Fed must make decisions under unfavorable conditions, after the statistical blackout with paralysis of the activities of the American government, the latest employment data shows only a marginal deterioration. The bank’s unemployment rate projections remained unchanged from the previous meeting and stood at 4.5% in 2025, 4.4% in 2026 and 4.2% the following year. The statement, however, places more emphasis on the risk of rising inflation. This is a strange composition, because next year the economy will again grow above potential (1.8%) and will remain so in 2027. Inflation, on the other hand, will be another 0.5 percentage points above the 2% target, reaching it in 2027, at 2.1%. Unemployment, in turn, after having increased slightly, will decrease to approach its historic lows, without any indication of the next steps.
According to Jerome Powell, Chairman of the Fed, all participants at the meeting agreed that inflation remained high and that risks to the labor market were increasing. “The big difference is how much weight to give to each of these factors. It was a close decision. We had to choose,” he said. The context is, however, positive. Consumption is doing well, fiscal policy is expected to be expansionary in 2026, with tax cuts approved by Congress, and investments are proceeding at a good pace. He attributes the increase in American productivity, of 2% in recent years, to the fact that the economy continues to grow with stable or slightly declining employment and that the increase in wages does not have a significant impact on inflation.
Powell was more confident in predicting that the effect of the tariffs would be short-lived and would not send price indexes to a new level. There has been a significant shift in the inflationary mix: service prices, which previously prevented a significant decline in consumer price indexes, are now falling, and goods inflation, previously modest, is rising, due to the effect of tariffs, which the Fed presumes to be temporary.
The next steps, according to Fed members’ projections, indicate a pause in federal funds cuts. According to Powell, restrictive monetary policy has brought interest rates into a range already considered close to neutral, which neither contracts nor stimulates the economy. After three reductions, which cumulatively amounted to 0.75 percentage points, the bank will observe the effects. Powell said that today there is no question of a rate increase.
The Central Bank of Brazil maintained the interest rate and did not indicate its next steps. The recognition that monetary policy has now produced more powerful effects, expressed in the fall in inflation and the cooling of the economy, revealed by the near stagnation of GDP in the third quarter, was accompanied by the warning that long-term inflation remains unanchored, but the distance between the target and the IPCA projected in the baseline scenario narrowed from 3.3% to 3.2%, virtually in line with the target, in the second quarter 2027.
The IPCA published yesterday guarantees that inflation will return to the tolerance band, at 4.46% in the twelve months to November, and close the year below the 4.5% ceiling. The positive elements recorded in the October IPCA continued to be present, in particular the fall in food and drink prices, supported by the same development in health and personal care and deflation in household and communication items.
The scenario for 2026 is complex, especially as the electoral calendar gradually begins to impact asset prices. One factor to consider in fluctuations is the dollar, which has a strong influence on domestic prices. More important in the short term are the measures that the Lula government will take to improve the president’s chances of re-election. There are around 200 billion reais of credit stimuli in programs that favor the incumbent and others on the way (Valor, yesterday). An increase in tax and parafiscal spending could stop the fall in inflation and the fall in interest rates.
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