Division, data blackout at last Fed meeting of 2025: Analysts

The US Federal Reserve has started its eighth and final meeting of the year on Dec. 9, amid a sharp split among policymakers over the next step in monetary policy, following back-to-back rate cuts in September and October.

Although markets are pricing in an additional quarter-point cut, attention is shifting beyond the decision itself toward any signals on the interest-rate path for 2026, particularly given the current ambiguity in economic data and the effects of political developments.

Several analysts told Argaam that an interest rate cut has now become expected and fully priced in by the markets, adding that the focus will shift to the tone of the decision and the forward guidance, amid the absence of official data and the persistence of inflationary pressures.

Expected Cut… Focus Shifts to the Tone

Ahmed Azzam, Head of Research at Equity Group, said that a 25-basis-point interest rate cut would not come as a surprise to the markets, as it has already been priced in. He added that the real market reaction will shift from the decision itself to the tone of the statement and future guidance.

The market will try to determine whether this cut is a dovish cut that paves the way for further easing, or a hawkish one that sets strict conditions for any subsequent cuts—especially in light of the delay in several official reports related to the labor market and inflation, according to the analyst.

Azzam highlighted that inflation remaining close to 3%, above the Federal Reserve’s 2% target, would push policymakers to adopt a cautious tone, emphasizing that victory over rising prices has not yet been achieved and that any reduction in tightening would only be temporary.

For his part, Hany Abu Akleh, Senior Market Analyst at XTB MENA, said that markets are pricing in an interest rate cut with a probability ranging between 87% and 90%, but it is likely that the Federal Reserve will wrap it in a “hawkish cut” tone, tying any future steps to incoming data.

He added that this tone would be understood as a risk-management strategy aimed at providing precautionary support to the labor market without opening the door to a broad easing cycle that could revive inflationary pressures.

Abu Akleh also pointed out that investors’ focus will be on Jerome Powell’s speech to detect any hints regarding the future path of interest rates, especially amid conflicting economic indicators.

Internal Divisions… Risks to Stability

Azzam expects that divisions within the Federal Open Market Committee will lead to a disjointed pattern in monetary policy during 2026—cutting rates, then pausing, followed by reassessment—rather than a smooth and consistent trajectory, especially if the “dot plot” shows wide dispersion in members’ expectations.

The split between a camp advocating deeper cuts to support the labor market and another camp that is cautious about a resurgence of inflation curbs Powell’s ability to provide clear guidance and increases market sensitivity to upcoming employment and inflation data.

Meanwhile, Abu Akleh suggested that today’s meeting may witness a rare level of division, with the possibility of 3 to 5 dissenting votes, between “hawks” such as Jeffrey Schmid who favor holding rates steady, and “doves” such as Stephen Miran who prefer a larger cut.

He noted that such divergence would weaken the Fed’s ability to present a unified outlook, raise the “uncertainty premium” in the markets, and push investors to price in higher risk on long-term debt instruments.

Data Shortage Complicates Decision

Regarding the impact of the government shutdown, Abu Akleh said the Federal Reserve is entering the meeting in a state of "partial blindness" due to the absence of official employment and inflation data, forcing it to rely on alternative indicators such as the ADP report, which pointed to weakness in employment.

He noted that this situation requires the Fed to exercise greater caution and postpone any long-term strategic decisions until the return of government data, which he described as the "gold standard" for assessing the economy.

Azzam explained that in this scenario, Powell relies on a set of alternative indicators, including private employment data, activity surveys, Fed branch indicators, spending data, shipping, and job postings.

He pointed out that these indicators are more volatile and riskier than official data, reinforcing the Fed’s cautious approach and avoidance of committing to a clear rate-cut path before regaining the full picture.

If a rate cut occurs today, it could break the Fed's traditional image of data-driven decision-making, raising questions about whether the board has hidden signals of an actual deterioration in the labor market.

2026: Divergent Scenarios Between Economy and Politics

On economic forecasts, Abu Akleh noted that the expected "dot plot" to be released today may show a decline in the average interest rate projections for 2026 to a range of 3%-3.25%, lower than the September estimate of 3.4%.

He added that markets are closely monitoring growth and inflation expectations, with Fed estimates pointing to 1.8% growth, 4.4% unemployment, and 2.6% consumer spending inflation. Any upward revision in inflation expectations would be read by markets as a signal of Fed concern about the future interest rate path.

The US political landscape adds another layer of volatility, with expectations that Kevin Hassett or Kevin Warsh could be nominated as Fed Chair, which may increase concerns about the independence of monetary policy.

He emphasized that any doubt about the board’s independence could translate into jumps in bond risk premiums and greater volatility in interest rate pricing, noting that "the numbers suggest a calm path, but politics can disrupt it quickly."

Key Points Under the Microscope

Azzam pointed out that Powell’s statements on the balance sheet or quantitative easing during the press conference will directly affect risk appetite, especially after the announcement of the halt of monetary tightening on Dec. 1.

He added that the number of dissenting votes could be a decisive indicator of the policy shape in 2026, stressing that the variability of economic data makes reaching a consensus within the board "nearly impossible."

Azzam did not rule out the possibility of keeping the interest rate unchanged in the meeting at a probability between 20%-25% if division within the committee widens, leaving the outlook open to all scenarios in the coming year.