The Federal Reserve has entered a period of unusually sharp internal divisions, with central bankers increasingly split over how to steer an economy facing two opposing forces: persistent inflation and a labor market that’s losing momentum.
The clearest evidence of this divide arrived in late October, when officials cut interest rates by a quarter percentage point for the second straight month, but over the objections of two policymakers, one who wanted a more aggressive cut and another who wanted to hold rates steady.
It was the first double dissent since 2019, highlighting a fracture in the consensus that has defined much of Chair Jerome H. Powell’s eight-year tenure. In all, the usually unanimous central bank has recorded five dissents across its last three meetings, a level of division not seen since before the pandemic either.
Those disagreements, likely to widen in the months ahead, could resurface Wednesday, when the Fed releases the minutes from its October meeting. The split matters because it may make the central bank harder to read for outsiders, complicating expectations for both investors and consumers, whose borrowing rates for everything from cars to homes are influenced by Fed policy.
Investors have already adjusted: Expectations for a December rate cut have fallen from roughly 95 percent certainty to more of a toss-up, following Powell’s signal that a third straight cut isn’t guaranteed and cautionary comments from regional Fed presidents. The uncertainty is also rippling through stock markets, which dropped for a fourth straight session Tuesday, driven by growing skepticism over artificial intelligence valuations.
“As with the lead-up to the December meeting, you could have more uncertainty about where the Fed is going to land as decisions approach,” said Jon Hilsenrath, a senior adviser to StoneX Group, a financial services firm.
The divide appears to pit a hawkish coalition of regional Fed presidents, more worried about rising prices, against a group of Fed governors in Washington advocating further cuts to keep the economy from sagging. Officials like Cleveland’s Beth Hammack, who has said she would have preferred not to cut in October, argue that inflation remains stubbornly above the bank’s 2 percent target. Hammack has warned that cutting rates too soon could allow inflation to become entrenched in expectations. Dallas Fed President Lorie Logan has expressed similar caution, signaling reluctance to continue easing.
On the other side, some governors — particularly those with ties to the Trump administration — see continued rate cuts as necessary to support a weakening labor market. Stephen Miran, who is on leave from the White House, dissented in October to vote for a larger cut, while Fed governor Christopher Waller, speaking Monday on “the case for continuing rate cuts,” said the labor market is “still weak and near stall speed.”
“A December cut will provide additional insurance against an acceleration in the weakening of the labor market,” said Waller, who is under consideration to succeed Powell as chair next year.
The policy dilemma is stark. Inflation, about 3 percent, has remained above target for nearly five years, as job growth has slowed and unemployment is ticking up. The Fed wrestled price increases down from the highs they hit under President Joe Biden, but now it faces a new difficulty. Standard monetary theory calls for opposite responses to the problems the economy presents today: higher rates to cool prices, lower rates to support employment. The Fed is being pulled in both directions at once. This tug-of-war complicates the committee’s deliberations and raises the stakes for each vote, as any misstep could have outsized consequences for the broader economy.
The central bank has to act decisively to rein in prices without choking off the fragile labor market.
Economists have dubbed the situation “stagflation-lite,” echoing the 1970s-era challenge of balancing inflation and stagnant growth, though the current environment is less severe.
Now investors are looking at a more cautious, reactive Fed, which could mean markets swing sharply on each new economic report that offers a preview of what December’s meeting will bring.
Krishna Guha of Evercore ISI warned that the Fed’s split over a December rate cut risks becoming “a crisis of governance,” undermining Powell’s ability to lead an increasingly polarized committee as his term winds down.
In that environment, Guha said, the Fed is likely to become “more uncertain and more reactive to the data rather than preemptive” — a combination he called negative for markets.
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