Federal Reserve set to cut rate but may signal a pause to come
By CHRISTOPHER RUGABER, Associated Press business editor
WASHINGTON (AP) — The Federal Reserve faces an unusually contentious meeting this week that will test Chairman Jerome Powell’s ability to muster needed support from fellow policymakers for a third straight interest rate cut.
The Fed’s 19-member rate-setting committee is sharply divided on whether to cut borrowing costs again. Divisions have been exacerbated by the convoluted nature of the economy: Inflation remains high, which would typically lead the Fed to keep its benchmark rate unchanged, while hiring is weak and the unemployment rate has risen, which often leads to rate cuts.
Some economists expect three Fed officials to vote against the quarter-point cut that Powell is likely to support at the Dec. 9-10 meeting, which would be the most dissenting vote in six years. Only 12 of the 19 members vote on tariff decisions. Several non-voting officials also said they opposed further rate cuts.
“It’s just a really tricky time. Perfectly sane people can come to different answers,” said William English, an economist at the Yale School of Management and former senior Fed official. “And the committee kind of likes to work by consensus, but this is a situation where that consensus is difficult to achieve.”
The debate, which has also been fueled by the lack of official federal data on employment and inflation during the government shutdown, could be a preview of the direction the Fed will take after Powell’s term as chairman ends in May. His successor will be appointed by President Donald Trump and is expected to be Kevin Hassett, the White House’s top economic adviser. Hassett could push for faster cuts than other officials would be willing to support.
English said the possibility of greater disagreement could be seen as a sign of healthy debate between different viewpoints. The Fed’s tradition of making unanimous or near-unanimous decisions has often been criticized as evidence of “groupthink.” Still, some Fed officials warn that sharp divisions have downsides. If the committee votes end up 8 to 4, or even 7 to 5, then financial markets could lose confidence in the direction the central bank takes next.
Fed Governor Christopher Waller, for example, said that in a 7-5 vote, if just one official changed his mind, it could lead to a significant change in Fed policy.
For now, however, most economists expect what’s known as a “hawkish taper”: The Fed will cut rates, while signaling that it may wait some time to assess the health of the economy. (“Hawks” refer to officials who generally support higher rates to combat inflation, while “doves” more often support lower rates to boost hiring).
Kansas City Federal Reserve President Jeffrey Schmid is expected to disagree for a second straight meeting in favor of keeping rates unchanged. He could be joined by the president of the St. Louis Fed, Alberto Musalem. Fed Governor Stephen Miran, hastily appointed to the Fed board by Trump in September, will likely disagree for a third straight meeting in favor of a deeper, half-point cut in the Fed’s policy rate.
After the Fed’s last meeting on Oct. 28-29, several policymakers said they would prefer to keep rates unchanged at the December meeting, leading Wall Street investors to briefly lower the odds of a third rate cut to below 30%. But then John Williams, president of the New York Fed, said this year’s rise in inflation appears to be a temporary blip due to Trump’s tariffs that should fade by mid-2026.
As a result, “I still see room for further adjustment” of the Fed’s short-term rate, Williams said. As president of the New York Fed and vice chairman of the interest rate-setting committee, Williams votes on every interest rate decision and is close to Powell. Analysts said it was unlikely Williams would have made such a statement without Powell’s support. Investors quickly increased the odds of a decline, which now stand at 89%, according to CME Fedwatch.
“You see the power of the president,” said Nathan Sheets, chief global economist at Citi and also a former senior Fed official. “My gut tells me that committee members want to emphasize their support for Powell. »
Powell has been the subject of relentless attacks from Trump, who said last month that he “would love to kick his ass” and called Powell “that clown.”
Congress directs the Fed to pursue low inflation and maximum employment, two potentially conflicting goals.
For now, Powell and many other Fed officials are more concerned about hiring and unemployment than inflation. While the government’s official employment reports were delayed, in September the unemployment rate reached 4.4%, the third consecutive increase and the highest in four years.
Payroll provider ADP, meanwhile, reported that in November its data showed companies cut 32,000 jobs. And many large companies have announced mass layoffs.
Fears of a deteriorating labor market are a key reason why a rate cut is likely in December – but not necessarily beyond. Fed officials will have up to three months of late employment and inflation data to review when they meet in late January. These numbers could show that inflation remains stubbornly high or that hiring has rebounded, which would suggest further cuts are not necessary.
“What they might end up agreeing to is cutting rates now, but giving some guidance … that indicates they’ll pause for a while after that,” said Kathy Bostjancic, chief economist at Nationwide.
