Federal Reserve set to cut rate but may signal a pause to come

The Federal Reserve faces intense internal divisions over its upcoming interest rate decision at this week’s meeting, presenting a significant leadership test for Chair Jerome Powell as he seeks to build consensus for a third consecutive rate cut.

With the economy sending mixed signals, the Fed’s 19-member rate-setting committee finds itself unusually split on the best path forward. The core challenge stems from contradictory economic indicators: inflation remains stubbornly elevated, which typically argues against rate reductions, while hiring has weakened and unemployment has risen, which traditionally prompts the Fed to cut rates to stimulate economic activity.

Some economists anticipate that three Fed officials could vote against the quarter-point rate cut Powell is expected to support at the December 9-10 meeting, which would mark the highest number of dissenting votes in six years. While only 12 of the 19 members have voting power on rate decisions, several non-voting officials have also publicly opposed another rate reduction.

“It’s just a really tricky time. Perfectly sensible people can reach different answers,” noted William English, an economist at Yale School of Management and former senior Fed staff member. “And the committee kind of likes to work by consensus, but this is a situation where that consensus is hard to reach.”

The debate has been further complicated by the lack of official federal data on employment and inflation during the recent government shutdown. This internal division may foreshadow the Fed’s future direction after Powell’s term expires in May. His successor, to be appointed by President Donald Trump, is widely expected to be Kevin Hassett, the White House’s top economic adviser, who might advocate for more aggressive rate cuts than other Fed officials would support.

Some observers view the increased disagreement as healthy, representing diverse perspectives rather than groupthink. However, Fed officials have warned about potential downsides to sharp divisions. A closely divided vote of 8-4 or 7-5 could undermine market confidence in the Fed’s future policy direction.

Fed Governor Christopher Waller has cautioned that with a closely split 7-5 vote, just one official changing their position could trigger a significant shift in monetary policy.

Most economists anticipate what market watchers call a “hawkish cut” – a rate reduction accompanied by signals that the Fed may pause to evaluate economic conditions before making further adjustments. In Fed terminology, “hawks” typically favor higher rates to combat inflation, while “doves” generally support lower rates to boost employment.

Jeffrey Schmid, president of the Kansas City Federal Reserve Bank, is expected to dissent for a second consecutive meeting, preferring to keep rates unchanged. He may be joined by Alberto Musalem, St. Louis Fed president. Meanwhile, Fed governor Stephen Miran, appointed to the board by Trump in September, will likely dissent for a third straight meeting – but in favor of a larger half-point rate cut.

After the Fed’s previous meeting in late October, several policymakers indicated they would prefer to maintain current rates at the December meeting. This briefly reduced market expectations for a third rate cut to below 30%. However, New York Fed President John Williams subsequently stated that this year’s inflation uptick appears temporary, largely driven by Trump’s tariffs, and would likely fade by mid-2026.

Williams, who holds a permanent voting position and serves as vice chair of the rate-setting committee, added, “I still see room for a further adjustment” in the Fed’s short-term rate. Analysts believe such a statement from Williams, who works closely with Powell, likely indicates the Chair’s own position. Following these comments, market expectations for a December rate cut surged to 89%, according to CME Fedwatch.

“You’re seeing the power of the chair,” observed Nathan Sheets, chief global economist at Citi and former top Fed staffer. “Members of the committee, my instinct is, are wanting to underscore their support for Powell.”

Powell has faced persistent criticism from President Trump, who recently said he would “love to fire his ass” and called Powell “this clown.”

The Fed’s congressional mandate requires it to pursue both low inflation and maximum employment – goals that can sometimes conflict. Currently, Powell and many Fed officials appear more concerned about employment trends than inflation. The unemployment rate rose to 4.4% in September, its third consecutive increase and highest level in four years. Meanwhile, payroll provider ADP reported that companies cut 32,000 jobs in November, while numerous large corporations have announced significant layoffs.

Concerns about deteriorating labor market conditions make a December rate cut likely. However, future cuts remain uncertain. When Fed officials meet in late January, they will have access to three months of backlogged jobs and inflation data. These figures could reveal persistently high inflation or a hiring rebound, either of which would suggest further cuts aren’t necessary.

“What they may end up agreeing to do is cut rates now, but give some guidance that signals they’re on pause for a while after that,” said Kathy Bostjancic, chief economist at Nationwide.