The US Fed expected a rate cut, but could signal an upcoming pause

The U.S. Federal Reserve is expected to cut interest rates on Wednesday as policymakers grapple with gaps in economic data from the recent government shutdown and navigate competing views on the risks facing the economy. The expected quarter-of-a-percentage-point cut could be accompanied by a noncommittal or even aggressive approach to next year’s interest rate path, given the division among policymakers between those skeptical about the need for more rate cuts in the face of still high inflation and those who think the economy and labor market could weaken if the US central bank does not lower borrowing costs. New quarterly economic projections to be released along with the latest interest rate decision will show how Fed officials expect the economy to develop in 2026, along with what they see as the appropriate interest rate path. However, these forecasts for the coming year often quickly become outdated due to incoming data and say little about the pace of expected policy actions. The projections released this week may have a particularly short shelf life. Within days of the Fed meeting, U.S. statistical agencies will release a trove of data delayed by the 43-day shutdown, including jobs and inflation reports for November, that could help resolve the core debate among central bankers. Another reason for the interest rate-setting Federal Open Market Committee to be cautious, even if it is going to lower its policy rate to the range of 3.50%-3.75%. “We expect the FOMC to implement a 25 basis point cut this week, with decidedly more aggressive guidance,” TD Securities analysts wrote ahead of this week’s two-day policy meeting. “The decision will likely be as or even more controversial than October’s.” The last top-line data the Fed received on inflation and employment, the two main areas of concern, was for September, when the unemployment rate rose slightly to 4.4%, and the central bank’s preferred measure of inflation was 2.8% versus the 2% target. The Oct. 29 decision to cut the policy rate to the current range of 3.75% to 4.00% sparked dissent in favor of both tighter and looser monetary policy, a rarity that reflected the risk of persistent inflation that some regional Fed bank governors have cited as their top concern, and the possibility of a fading labor market that some members of the central bank’s Governing Council have placed at the center of their approach to monetary policy. Fed Governor Stephen Miran, on leave from his job as a White House economic adviser, has dissented in favor of deeper cuts of half a percentage point at each of the two meetings he has attended, and may do so again. Several presidents of regional Fed banks have publicly opposed further cuts, with dissent possibly expected from one or more of them.The interest rate decision, projections and a new policy statement will be released at 2:00 PM EST (7:00 PM GMT). Fed Chairman Jerome Powell will hold a press conference half an hour later.

HIGHER BAR FOR FURTHER RATE REDUCTIONS

In addition to the expected rate cut, investors currently expect the Fed to make two more rate cuts of a quarter of a percentage point by the end of 2026, keeping the policy rate between 3.00% and 3.25%.

From September onwards, policymakers took a more aggressive stance, with the median projection showing the benchmark interest rate to be between 3.25% and 3.50% at the end of 2026. Eight of the 19 forecasts were higher, and some regional officials have since further tightened their views on appropriate policies. Michael Feroli, chief US economist at JP Morgan, said emerging hawkish views among reserve bank governors could leave the 2026 interest rate outlook unchanged from September, with support for even this week’s expected cut already narrow and a higher bar for further cuts. The new interest rate projections will “reflect unease about the cut,” Feroli said, with the policy statement possibly shifting “to reflect that a cut is less likely at subsequent meetings,” and Powell stressed at the post-meeting news conference “that further cuts would only be accompanied by a material deterioration in the labor market.”

Such an outcome would do little to resolve the policy conflict within the Fed, or between the central bank and President Donald Trump, who has demanded steep interest rate cuts since returning to power a year ago. Trump is in the process of choosing a successor to Powell, based in part, he said this week, on each nominee’s willingness to cut funding costs. The main argument in favor of a rate reduction is to prevent a sharp downturn in the labor market; Opponents of a rate cut argue that inflation could persist and rise even further next year as the impact of Trump’s tax cuts potentially boosts household and business spending. Between the end of Powell’s tenure as Fed chief in May and divided opinion at the central bank, policymakers could find it harder to communicate their plans, Standard Chartered economists Steve Englander and John Davies wrote in an analysis of the upcoming meeting.

“How markets view December’s signals going forward is complicated by the fragmentation of FOMC positions, unreliable policy communications from the Fed, the impact of the shutdown on data, the impending end of Fed Chairman Powell’s term, uncertainty about how much credibility his successor will have, and possible turnover among FOMC participants,” they wrote. “We think markets may be right to be skeptical of any message given the uncertainty over who will be in those seats in the coming months.”