Divided Fed Prepares to Slash Interest Rates Amid Tough Decision

The Federal Reserve is poised to make a critical decision to reduce interest rates, reflecting ongoing tensions within its policy-making body. This upcoming meeting marks a challenging moment for the Fed, reminiscent of the discussions regarding rate changes from September 2024.

Interest Rate Cuts Amid Policy Divisions

The Federal Reserve’s rate-setting committee is divided over priorities: maintaining full employment versus controlling inflation. This year, job growth has faltered, prompting some officials to advocate for further rate reductions to bolster employment. Conversely, others warn that continued rate cuts could lead to sustained inflation rates exceeding the Fed’s target of 2%.

Jerome Powell’s Final Meeting

This meeting will also be Chair Jerome Powell’s last before a new chair is nominated. President Trump indicated last week an upcoming announcement regarding Powell’s successor. With Powell’s term concluding in May, the nomination process typically unfolds by spring.

Economic Data Uncertainty

Key economic indicators for employment and inflation from October and November are not yet available, adding uncertainty for Fed officials. Recent government data releases have not significantly shifted the current discussions. Angelo Kourkafas, a senior global investment strategist, noted the existing divisions within the Fed, predicting a cautious outlook alongside the expected rate cut.

Projected Rate Cuts and Market Reactions

The Fed is likely to release updated economic projections, commonly referred to as the “dot plot.” Expectations suggest only two rate cuts for the next year. Following recent comments by New York Fed President John Williams, market forecasts for a December rate cut jumped from 40% to approximately 70%.

Labor Market Indicators

Despite a reported uptick in jobs in September, the unemployment rate rose, indicating potential labor market weaknesses. Concerns have emerged, with longer job search times and job growth concentrated in limited sectors. San Francisco Fed President Mary Daly expressed doubts about the labor market’s resilience, raising anxiety about future adjustments.

Inflation Challenges

Over the past two years, the Fed has cut interest rates by 1.5 percentage points in response to labor market conditions. Should officials proceed with a third consecutive cut this month, it would lower borrowing costs to their lowest since October 2022.

• Inflation rates may remain elevated, with projections extending into 2026 due to tariff impacts.
• Several Fed officials, including Dallas Fed President Lorie Logan, caution against premature cuts without clear evidence of falling inflation or labor market cooling.

While tariff-related inflation has had a modest effect, it has not reached dire levels predicted earlier. The Fed plans to announce its interest rate decision at 2 p.m. ET, with subsequent commentary from Chair Powell at 2:30 p.m. ET.