The Federal Reserve is expected to cut interest rates for the third meeting in a row on Wednesday, but the bigger question is whether this is the last cut we see for a while. Markets are betting on a quarter-point reduction that would take the federal funds rate to 3.5 to 3.75 percent. After that, the path gets murky.
The Fed is split between officials who want to guard against a weakening labor market and those who worry that more easing risks keeping inflation stuck above target. That divide is why investors are bracing for what many are calling a “hawkish cut.” The Fed cuts, but signals that no one should expect a repeat anytime soon.
The tone will be shaped by three things: the statement, the updated “dot plot” of future rate expectations, and Chair Jerome Powell’s press conference. Economists expect language that raises the bar for more cuts and reminds markets that policy may already be close to neutral.
A Committee With More Disagreement Than Data
This meeting comes with an unusual challenge. Because of the government shutdown, Fed officials have very little fresh data. The October labor report won’t be released until December 16, and the next inflation reading arrives two days after that.
The data the Fed does have is mixed. Job openings were little changed, but hiring fell by 218,000 and layoffs rose by 73,000. Inflation came in at 2.8 percent in September, slightly below expectations but still well above the 2 percent target.
Some policymakers argue that inflation cannot drift lower if policy becomes too loose. Former Cleveland Fed President Loretta Mester said Tuesday that inflation is “pretty well above the goal” and that tariffs are not the only factor keeping prices elevated. Even so, she expects one more cut this week.
Expect Dissents and a Messy Dot Plot
The October meeting already featured two dissents, one from each side of the rate debate, and economists expect a similar split this time. Analysts also expect several “soft dissents” to show up in the dot plot, revealing just how divided officials are on where rates go next.
Powell’s challenge will be to explain a committee with sharply different views. Some officials think the Fed is already at neutral. Others think more cuts are needed to support growth. Still others believe policy must stay restrictive to finish the inflation battle. Powell cannot promise what comes next, because the committee itself cannot agree.
Balance Sheet Questions Linger
There may also be clues about the Fed’s balance sheet plans. In October, the Fed signaled it might stop allowing maturing bonds to roll off. Some in the market expect the Fed to resume bond purchases to ease pressure in funding markets, although not at a pace that resembles full-blown quantitative easing.
Why This Cut Might Be the Last One for a While
A separate Bloomberg analysis echoes the same theme: the Fed is likely to cut on Wednesday but may then hit pause. Officials have already lowered rates twice this fall and by 1.5 percentage points over the past 15 months. Every additional cut risks stimulating the economy at a moment when inflation is still above target.
The lack of new data, rising internal divisions, and concern about sticky prices all point in the same direction. The Fed looks set to deliver one more cut, while keeping its forward guidance intentionally foggy.