Fed Faces Controversial Rate Cut Decision This Week

UPDATE: The Federal Reserve is set for a critical meeting on December 9-10, 2023, with a decision on a third consecutive interest rate cut hanging in the balance. Chair Jerome Powell faces intense divisions among the 19-member policy committee, raising questions about the central bank’s direction amid an uncertain economic landscape.

The committee’s stark divide comes as inflation remains elevated, traditionally a trigger to maintain higher rates, while rising unemployment—now at 4.4%—could push for cuts. Analysts predict a potential dissenting vote from three Fed officials, marking the highest level of disagreement in six years.

“This is a really tricky time. Perfectly sensible people can reach different answers,” stated William English, an economist at Yale and former Fed staff member. The ongoing debate could influence the Fed’s strategy following Powell’s term, which ends in May. President Donald Trump is expected to nominate Kevin Hassett, the current White House economic adviser, as Powell’s successor. Hassett’s push for aggressive rate cuts could further complicate the Fed’s internal dynamics.

As the government shutdown delays crucial employment and inflation data, officials warn that significant splits in voting could undermine market confidence. If the committee votes result in a narrow margin like 8-4 or 7-5, it could lead to volatility in financial markets.

Fed Governor Christopher Waller has expressed concerns that even a single change in dissenting votes could lead to substantial shifts in policy. Currently, many economists anticipate what’s termed a “hawkish cut,” where the Fed lowers rates while signaling caution in future adjustments.

The expected dissenters include Jeffrey Schmid, president of the Kansas City Fed, and Alberto Musalem from St. Louis, both likely to oppose the cut. Meanwhile, Stephen Miran, who recently joined the board, may call for a more drastic half-point reduction.

After the last meeting held on October 28-29, several policymakers hinted at a preference to hold rates steady. Wall Street investors initially reduced the likelihood of a rate cut to under 30%. However, comments from John Williams, president of the New York Fed, shifted sentiment. He indicated the recent inflation spike was likely temporary, suggesting a potential for further adjustments to the Fed’s short-term rate, which analysts believe aligns with Powell’s vision.

“The power of the chair is evident,” noted Nathan Sheets, chief global economist at Citi. “Committee members appear to be reinforcing their support for Powell amidst ongoing pressures from Trump, who has openly criticized Powell’s leadership.”

The Fed’s dual mandate to maintain low inflation and maximum employment presents a challenging paradox, especially as the official jobs report remains on hold. With rising unemployment and delayed data, the Fed is currently prioritizing jobs over inflation concerns.

As the Fed prepares for this pivotal meeting, all eyes will be on how the committee navigates its internal divisions and what implications that may hold for the U.S. economy. Stay tuned for live updates as this situation develops.