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The Federal Reserve has cut interest rates to a three-year low after a divisive meeting that exposed deep fractures in the central bank over whether to prioritise a weakening jobs market or high inflation.

The central bank on Wednesday lowered its benchmark rate by a quarter point to between 3.5 and 3.75 per cent as widely anticipated by Wall Street. It marked the third reduction in borrowing costs in a row.

Policymakers noted that “downside risks to employment rose in recent months” as the jobless rate increased and hiring slowed, while also indicating that inflation remained “somewhat elevated”.

Stocks and bonds rallied following the rate cut. Wall Street’s S&P 500 share gauge closed 0.7 per cent higher, though futures pointed to the index falling 0.9 per cent when it opens later on Thursday.

Meanwhile, the two-year Treasury note yield, which is sensitive to monetary policy expectations, fell 0.08 percentage points to 3.53 per cent. Bonds move inversely to prices.

Three of the dozen voters on the Fed’s policy-setting board objected to the central bank’s quarter-point cut, the most powerful revolt since 2019.

The debate inside the Fed comes as President Donald Trump has insisted the central bank should cut rates much more aggressively while repeatedly criticising chair Jay Powell.

The president on Wednesday said the Fed’s interest rate cut should have been “at least double”, while he decried the “deadhead Fed”.

“This guy, the head of the Federal Reserve, is a stiff,” Trump said, referring to Powell.

Fed governor Stephen Miran, a staunch ally of the president, called for a 0.5 percentage point cut, while the Chicago Fed’s Austan Goolsbee and the Kansas City Fed’s Jeffrey Schmid called for no change.

Powell hinted that the bar for further rate cuts in the new year was high, saying after the meeting that interest rates were “now within a broad range of estimates of its neutral value, and we are well positioned to wait to see how the economy evolves”.

But the so-called dot plot of projections of senior Fed officials released on Wednesday laid bare the deep discord among policymakers.

The median forecast showed that officials expect just one 0.25 percentage point cut next year, steady from the previous dot plot in September. However, three members thought borrowing costs would end 2026 higher than they are now, while one pencilled in six quarter-point cuts.

“Everyone around the table at the [Federal Open Market Committee] agrees that inflation is too high and we want it to come down and agrees that the labour market has softened and that there’s further risk,” Powell said. “Where the difference is, is how you weigh those risks.”

Goldman Sachs noted that there were also several “shadow dissents” to Wednesday’s cut, with half a dozen of the 19 Fed officials who submit estimates for the dot plot indicating rates should have been left on hold.

“There will definitely be more heated debate going forward because there are very different opinions on the board, and for some, different priorities,” said Kristina Hooper, chief market strategist at Man Group.

Trump began holding interviews this week on who he will nominate to replace Powell when his term expires in May 2026, the Financial Times reported on Tuesday.

“I’m looking for somebody that will be honest with interest rates . . . honestly our rates should be much lower,” Trump said on Wednesday. He has previously said he would announce his pick early next year but on Wednesday said it was possible that a selection would be made in the next two weeks.

Kevin Hassett, a Trump ally and the frontrunner for the role, had said just prior to the Fed decision that while a quarter-point cut would be a small step in the right direction, the central bank had plenty of room to reduce rates and would probably need to ease policy further to bolster the economy.

While the jobless rate remains low by historical standards, more dovish FOMC members say other data shows the US economy is no longer creating jobs at a fast enough pace.

Others on the committee argue that signs of more inflation in the services sector that dominates US economic output mean the Fed has little room left to cut borrowing costs.

The projections released with the Fed statement show policymakers expect inflation to fall to 2.4 per cent by the end of next year — against a September estimate of 2.6 per cent. Headline personal consumption expenditures inflation was 2.8 per cent in the year to September. The Fed targets 2 per cent inflation.

The Fed also said on Wednesday that it would resume buying short-term Treasuries to ease strains in US money markets.

The central bank stopped shrinking its balance sheet at the start of this month as it decided that the so-called quantitative tightening process had soaked up enough liquidity from the financial system since it began in 2022.

Additional reporting by William Sandlund in Hong Kong