Fed Set to Cut Interest Rates Next Week
The Federal Reserve is highly likely to reduce interest rates by 25 basis points next week, which would adjust the federal funds rate to a range between 3.5% and 3.75%. This expectation is reflected in market behavior, and Federal Reserve Chairman Jerome Powell has hinted at this outcome in recent statements.
Yet, there’s a significant divide within the Federal Open Market Committee (FOMC), marking one of the most contentious periods in recent memory. This discord could have serious implications for monetary policy beyond 2026.
As Treasury Secretary Scott Bessent pointed out, the Fed chair holds just one vote among the FOMC, which is composed of seven Fed presidents (including the chair), the New York Fed president, and four of the other 11 Fed presidents. Historically, a majority has tended to back the chair, but it’s uncertain if this dynamic always leans toward the chair convincing the group or vice versa. A wise chair is, I think, less inclined to support measures that lack broad consensus. It’s not like the Supreme Court where the Chief Justice could end up in the minority.
There are definitely some voices within the committee that may oppose the cuts next week. Kansas City Fed President Jeffrey Schmidt has expressed a preference for a pause instead of a reduction. Other potential dissenters include Austan Goolsby of Chicago, Susan Collins of Boston, and Alberto Musallem of St. Louis. Michael Barr, President of the Federal Reserve, might also lean toward delaying cuts. While it seems unlikely that all five will oppose the cut, two or three probably will.
Furthermore, Gov. Stephen Milan is expected to be against it; he has shown a preference for more substantial cuts in recent meetings. It’s possible—though unlikely—that other Fed members might side with him this time. There are some dovish figures like Gov. Michelle Bowman and Gov. Christopher Waller, likely to support reductions.
The committee is also grappling with genuine uncertainty about the economic outlook. The ADP Private Payroll Report released this week indicated a contraction in employment for November, but surprisingly low weekly jobless claims suggest a resilient labor market. The Labor Department has announced that the October Household Employment Survey report will not be released, and there will be delays in the official payroll statistics for October and November until after the Fed’s meeting. According to the Atlanta Fed’s GDPNow report, the economy grew 3.8% in the third quarter, though the validity of this figure is questionable given the delays and missing data due to the government shutdown.
The jobless rate has been trending upward lately. The Fed’s own Economic Forecast Overview (SEP) anticipates it could rise to 4.6%, a slight increase over the median forecast of 4.5% from September, with a jump from 4.4% noted in that month’s jobs report.
Mr. Powell’s Press Conference: A Hawkish Angle?
The real intrigue will happen at Mr. Powell’s upcoming press conference where he’ll face three crucial questions.
First, can he convincingly present this month’s rate cut as a hawkish maneuver? He may feel the need to reassure the committee’s hawks by suggesting a substantial pause after the cut next week. However, the week following the FOMC meeting will present a slew of vital economic data, including labor statistics for October and November, November unemployment rates, and retail sales figures. With this data influx ahead of the January meeting, market participants might hold back on interpreting Fed policy, looking instead for specific triggers for any further cuts.
Second, is the current policy still restrictive? With core inflation lingering above target levels of 3.5-3.75%, Powell might argue that monetary policy isn’t particularly tight in real terms. It’s worth examining the SEP’s long-term projections for the federal funds rate, which has remained at 2.5% from mid-2019 to the end of 2023, and then climbed to 3% in 2024; an increase to 3.1% is anticipated at next week’s meeting.
Lastly, how does Powell address the hawks’ concerns? Are they, perhaps, not convinced that labor demand is decreasing? This would place them in opposition to many economists. Are they still apprehensive about the inflationary impact of tariffs? Or are they worried that additional rate cuts might ignite some “irrational exuberance” in the stock market? Understanding these perspectives is essential for grasping the future direction of policy.
To complicate matters further, Powell is increasingly seen as a lame duck. President Trump is expected to announce Powell’s successor around the January FOMC meeting, with White House Economic Advisor Kevin Hassett being a frontrunner. Once this news breaks, market focus will likely shift from Powell to the guidance of the incoming chairman.
While Powell will remain in charge through the January, March, and April 2026 meetings, the overall path of policy will likely be shaped by his successor. Additionally, Trump could appoint two more governors, potentially changing the Fed’s makeup significantly by mid-next year.
One question often posed to Powell at press conferences is whether he plans to step down as chairman at the end of his term. Traditionally, such transitions have occurred, but Powell, with two years remaining, has repeatedly avoided confirming whether he will adhere to that precedent.
