The Federal Reserve is expected to cut interest rates on Wednesday at its final gathering of the year. Whether it marks the end of a series of reductions that began in September or if borrowing costs will fall further is up for debate.
The Fed finds itself in a uniquely complicated situation. The economy is sending mixed signals, and it is not entirely clear whether officials should be more concerned about inflation getting stuck above the central bank’s 2 percent target or the labor market suddenly weakening. The uncertainty has stoked intense divisions within the Fed, creating a conundrum for Jerome H. Powell, the chair, who is facing pressure from a multitude of fronts.
The rift — which has become more entrenched since the government shutdown delayed a raft of crucial economic data — will materialize on Wednesday in a variety of ways.
Dealing With Dissents
The most obvious sign will be in the form of official dissents cast by voting members of the policy-setting body, the Federal Open Market Committee. Since July, the 12 participants, some of whom vote on a rotating basis, have struggled to reach a consensus. No vote since that point has been unanimous, a rare sign of public disagreement for Mr. Powell, who has in the past been able corral his colleagues to move as a cohesive group even while navigating tricky economic terrain.
October’s quarter-point cut featured dissents in both directions. Stephen I. Miran, who joined the Fed earlier this year, wanted a larger, half-point cut. He warned the Fed was being overly cautious about inflation and risked a recession if it did not significantly lower interest rates. Jeffrey K. Schmid, president of the Kansas City Fed, took the opposite view, not wanting the Fed to cut at all on the basis that inflation had been stuck above the Fed’s 2 percent target for far too long.
A similar fissure is likely to appear on Wednesday.
Those in favor of a cut have influential backers, including John C. Williams, who as president of the Federal Reserve Bank of New York, is a close ally of Mr. Powell. Multiple members of the powerful board of governors in Washington are in favor, too. They argue that the labor market is vulnerable and worry more about spiking unemployment than persistent inflation.
But the cohort of officials urging caution has also grown more vocal, setting up the possibility of even more dissents against a cut. In the weeks leading up to Wednesday’s gathering, several voting members were noticeably hesitant about the Fed taking further action, such as Susan M. Collins, president of the Boston Fed, Austan D. Goolsbee of the Chicago Fed and Alberto G. Musalem of St. Louis.
Perhaps the loudest pushback, however, has come from officials who will cast a policy vote next year. They include Beth M. Hammack, who leads the Cleveland Fed, and Lorie D. Logan of the Dallas Fed. What that might mean is that the bar for further interest rate cuts may be hard to clear without unemployment rising. It also suggests that whomever is set to replace Mr. Powell as Fed chair when his term ends in May will likely struggle to push through substantially lower borrowing costs than what the economic backdrop calls for.
Decoding the ‘Dot Plot’
Economic projections released by the central bank on Wednesday are likely to highlight the Fed’s factions. The focal point will be the “dot plot,” a chart that aggregates what all 19 officials forecast will happen to borrowing costs over the coming years.
A quarter-point cut this week would lower interest rates to a new range of 3.5 percent to 3.75 percent. The first pressing question is just how many “soft dissents” there are for 2025. In this case, that would involve officials submitting a forecast for interest rates to have ended the year at the previous level of 3.75 percent to 4 percent, indicating their disagreement with a cut. Economists at Goldman Sachs expect five officials to register soft dissents.
The second pressing question is how many cuts will be penciled in for next year. As of September, the last time the Fed published a dot plot, most policymakers projected just one quarter-point cut after the trio delivered in 2025. That forecast is likely to hold on Wednesday, in part because the central bank has had limited data to turn to in recent months because of the government shutdown.
A deluge of official data is set to be released the week after the meeting, including the jobs report and the Consumer Price Index report for November. If there are clear signs that the labor market is weakening, that could prompt some officials to soften their stance and embrace the need for interest rate reductions next year.
Keeping Options Open
The Fed could give itself more wiggle room around its plans for interest rates by updating its policy statement as well, which will be published on Wednesday.
In October, the Fed said that it would assess the incoming economic data, evolving outlook and the balance of risks between its dual goals of a healthy labor market and low, stable prices “in considering additional adjustments” to interest rates.
Last year, when the Fed was laying the groundwork to pause cuts after a series of reductions that began in September, the central bank adjusted the policy statement language to say that it would consider those developments as it determined the “extent and timing of additional adjustments.” Many economists are looking for the Fed to include that language once again.
Mr. Powell will also have the opportunity to shape expectations during his news conference, which will take place shortly after the interest rate decision. At the last meeting, the chair was unusually blunt about the divisions that had emerged among his colleagues, which at the time threw into question whether the central bank would follow through with a cut this month. He noted that people not only thought differently about the economic outlook but also had different risk tolerances related to the labor market and inflation.
Mr. Powell is likely to echo those points on Wednesday and stop well short of ruling anything out.
Colby Smith covers the Federal Reserve and the U.S. economy for The Times.
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