Estimated read time: 5-6 minutes
- The Federal Reserve is expected to cut interest rates amid economic data gaps.
- Policymakers are divided on future rate cuts due to inflation and job market concerns.
- Fed Chair Powell's press conference will follow the rate decision at 12 p.m. MST.
WASHINGTON — The Federal Reserve is expected to cut interest rates on Wednesday as policymakers grapple with gaps in economic data caused by the recent government shutdown and work through competing views about the risks facing the economy.
The anticipated quarter-percentage-point cut may well come with a non-committal or even hawkish approach to next year's rate path given the division among policymakers between those skeptical about the need for more rate reductions in the face of still-elevated inflation and those who feel the economy and job market may weaken if the U.S. central bank doesn't bring down borrowing costs.
New quarterly economic projections to be released alongside the latest rate decision will show how Fed officials expect the economy to evolve in 2026, along with what they see as the appropriate path of rates. Those year-ahead forecasts, however, often become outdated quickly due to incoming data and say little about the pace of expected policy actions.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's meeting, U.S. statistical agencies will release a large tranche of data delayed by the 43-day shutdown, including job and inflation reports for November that could help resolve the core debate among central bankers — another reason for the rate-setting Federal Open Market Committee to be circumspect even as it moves to lower its policy rate to the 3.50%-3.75% range.
"We expect the FOMC to deliver a 25-basis-point cut this week with decidedly more hawkish guidance," analysts with TD Securities wrote ahead of this week's two-day policy meeting. "The decision will likely be equally or more contentious than October's."
The last top-line data the Fed received on inflation and jobs, its 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 at 2.8% versus its 2% target.
A fresh government report on Wednesday showed U.S. labor costs increased 0.8% in the third quarter, slightly less than expected and boding well for the outlook for services inflation.
The Labor Department's Employment Cost Index, seen as one of the better measures of labor market slack and a predictor of underlying inflation, suggests "that labor costs are not contributing to inflation risks at this time," wrote Carl Weinberg, chief economist at High Frequency Economics.
"There is nothing to worry about here. There is no convincing argument for a rate cut either," he said.
Even so, traders of interest rate futures took the data as firming the case for easier monetary policy, adding to bets on a rate cut on Wednesday and pricing in just better than even odds the Fed will deliver the first of two rate cuts in 2026 in April, rather than pausing until June.
Possibility of more dissents
The Oct. 29 decision to cut the policy rate to the current 3.75%-4.00% range produced dissents in favor of both tighter and looser monetary policy, a rarity that reflected the risk of persistent inflation that some of the Fed's regional bank presidents have cited as their paramount concern, and the possibility of a fading job market that some members of the central bank's Board of Governors have put at the center of their approach to monetary policy.
Fed Governor Stephen Miran, on leave from his job as an economic adviser in the White House, has dissented at each of the two meetings he has attended in favor of larger half-percentage-point cuts, and may well do so again. Several Fed regional bank presidents have publicly opposed further cuts, with possible dissents from one or more of them expected as well.
The rate decision, projections, and a new policy statement will be released at 12 p.m. MST. Fed Chair Jerome Powell is scheduled to hold a press conference half an hour later.
Higher bar for future rate cuts
In addition to the expected rate cut, investors currently anticipate the Fed will deliver two more quarter-percentage-point rate reductions by the end of 2026, leaving its benchmark policy rate in the 3.00%-3.25% range.
As of September, policymakers took a more hawkish view, with the median projection showing the benchmark rate ending 2026 in the 3.25%-3.50% range. Eight of the 19 projections were higher, and some of the regional officials have tightened their views of appropriate policy even further since then.
Michael Feroli, chief U.S. economist at J.P. Morgan, said the emerging hawkish views among the reserve bank presidents may leave the rate outlook for 2026 unchanged from September, with support for even this week's expected cut already narrow and a higher bar for further reductions.
The new rate projections will "reflect unease about cutting," Feroli said, with the policy statement possibly shifting "to indicate a cut is less likely at subsequent meetings," and Powell at the post-meeting press conference emphasizing "that further cuts would only come with a material deterioration in the labor market."
Such an outcome may do little to resolve the policy dispute within the Fed, or between the central bank and President Donald Trump, who has been demanding sharp rate cuts since returning to power a year ago. Trump is in the process of choosing a successor for Powell based in part, he said this week, on any nominee's willingness to cut borrowing costs.
The main argument in favor of lowering rates is to prevent a sharp downturn in the job market; rate-cut opponents argue that inflation could well persist next year and move even higher with the impact of Trump's tax cuts possibly set to boost household and business spending.
Between the end of Powell's term as Fed chief in May and the divided opinion at the central bank, it may get harder for policymakers to communicate their plans, Standard Chartered economists Steve Englander and John Davies wrote in an analysis of the upcoming meeting.
"How markets view the December signaling for the future is complicated by the splintering of FOMC views, unreliable policy communication from the Fed, the shutdown's impact on data, the approach to the end of Fed Chair Powell's tenure, uncertainty over how much credibility his successor will have and possible turnover among FOMC participants," they wrote. "We think markets may justifiably be skeptical on any messaging given the uncertainty over who will be sitting in those seats in coming months."
Contributing: Michael S. Derby and Ann Saphir
