The Federal Reserve is poised for a particularly contentious meeting this week, where Chair Jerome Powell’s ability to unite policymakers will be put to the test as discussions revolve around a potential third consecutive interest rate cut. The Fed’s 19-member rate-setting committee is experiencing notable divisions, with sharp disagreements about whether to lower borrowing costs again. This discord stems from the current economic landscape, characterized by elevated inflation, weak hiring, and a rising unemployment rate. Traditionally, such conditions would lead the Fed to consider holding rates steady due to inflation concerns, but the weakening job market is pushing some officials toward supporting rate reductions.
Economists predict that up to three Fed officials could cast dissenting votes against the quarter-point cut that Powell is expected to advocate at the upcoming December 9-10 meeting. This would represent the most dissenting votes the committee has seen in six years, as only 12 of the 19 members are eligible to vote on rate decisions, with several non-voting officials also expressing opposition to further reductions.
William English, an economist and former top Fed staff member, highlighted that this is a challenging time for the committee, where differing viewpoints are prevalent. He noted that the Fed has historically strived for consensus in decision-making, but the current situation complicates that pursuit.
The ongoing debate has been intensified by the absence of official federal data on employment and inflation, a consequence of the government shutdown. This scenario may foreshadow the Fed’s direction following Powell’s term, which concludes in May. The expectation is that President Donald Trump will appoint Kevin Hassett, his chief economic adviser, as Powell’s successor. Hassett’s approach could potentially favor more aggressive rate cuts than some current officials are comfortable supporting.
While the potential for disagreement may reflect a healthy exchange of ideas among Fed members, some officials also caution against the risks that come with pronounced divisions. A close vote, such as an 8-4 or 7-5 split, might undermine confidence in the central bank’s guidance moving forward. Fed Governor Christopher Waller pointed out that in a scenario of divided voting, even a single changing opinion could pivot the Fed’s policy stance significantly.
Predictions lean towards a so-called “hawkish cut,” where rates would be lowered while conveying a commitment to assess economic conditions before making further adjustments. Jeffrey Schmid, president of the Kansas City Federal Reserve Bank, is likely to dissent against the cut, and he may be joined by St. Louis Fed president Alberto Musalem. Meanwhile, Stephen Miran, a newly appointed Fed governor, is anticipated to dissent in favor of a more substantial half-point reduction.
Remarks from policymakers have indicated a preference to maintain rates at the December meeting, leading investors to briefly perceive the likelihood of a third cut as diminishing to below 30%. However, following statements from John Williams, president of the New York Fed, who suggested the recent inflation spike is likely temporary and linked to tariffs, expectations shifted back strongly towards a cut, with current odds at 89%.
The backdrop to this meeting is further complicated by President Trump’s vocal criticisms of Powell, which have included personal attacks. As the Fed navigates its dual mandate to manage inflation and promote maximum employment, current discussions suggest an emphasis on addressing hiring and unemployment rates, especially in light of recent data indicating a rise in unemployment to 4.4%, the highest in four years.
Looking ahead, Fed officials will have access to several months of delayed jobs and inflation data ahead of their January meeting, which might reveal persistent inflation pressures or a recovery in hiring, thereby influencing the necessity of future cuts. Economists speculate that the Fed could decide on an immediate rate cut while also signaling a pause in further reductions for the near future.
