Fed faces deep divisions on next rate move

The US Federal Reserve began its eighth and final meeting of the year on Tuesday, Dec. 9, following two consecutive rate cuts in September and October. This time, however, policymakers are sharply divided over the central bank’s next move.

A long-awaited shift
After keeping rates unchanged for five straight meetings earlier this year—despite mounting pressure from President Donald Trump and his administration—the Fed delivered a cumulative 50 bps in cuts over the last two meetings.

What matters to investors now?
While markets are heavily pricing in another 25 basis-point cut at today’s meeting, investors are almost entirely focused on the underlying rationale and the tone of Chair Jerome Powell’s remarks, rather than the rate decision itself. Close attention will also be paid to the Fed’s quarterly Summary of Economic Projections.

Back to easing​
At its September meeting, the Fed cut rates by 25 bps, but the bigger catalyst for markets was the Open Market Committee’s projection of two additional cuts this year—October and December. With those projections nearly realized, attention now turns to how the Fed assesses the critical months ahead and the trajectory it envisions for monetary policy.

Surprising Shifts

Following the October rate decision, investors’ expectations for another 25 bp-rate cut in December gradually dropped to below 50%, reflecting market uncertainty over the Fed’s messaging. However, expectations later rebounded — reaching over 85% later as investors reassessed incoming economic data.

Deep Divide

The minutes of the October meeting, released on Nov. 19, revealed skepticism among policymakers about the need for another rate cut in December. The minutes noted that “many participants” viewed leaving rates unchanged as the more appropriate action.

Unclear Signal

The use of the term “participants” — which includes non-voting policymakers — makes it difficult to determine the stance of actual voting members. Analysts also see the Fed’s intentionally vague language as a way to retain policy flexibility, especially given the long government shutdown and potential for sudden data shifts.

What Does Data Say?

The Fed’s preferred inflation gauge fell to 2.8% in September from 2.9% in August, according to the latest available readings. On the other hand, the US economy added 119,000 jobs in the same month, far exceeding expectations of 50,000. The November jobs report was delayed until after the December Fed meeting, while the October report was cancelled due to the shutdown.

Trump Administration Watching Closely

Kevin Hassett, Director of the White House National Economic Council — widely seen as the frontrunner to chair Fed after Jerome Powell’s term ends in May — said he believes there is room for the Fed to slash interest rates by more than 25 bps.

Trump Prepares for Powell’s Exit

US President Donald Trump stated that immediate support for interest rate cuts will be a core condition for anyone he nominates to lead the Fed after Powell, with markets awaiting an official announcement on his pick early next year. This comes amid concerns that a politically driven appointment could undermine the central bank’s independence.

Your Call

If you were a member of the FOMC, facing this incomplete data picture and Powell’s imminent departure, what would your rate decision be — and how would you see the next few months unfolding?

Source: Argaam