Will the Federal Reserve be able to complete a third consecutive rate cut?

The Federal Reserve faces an exceptionally contentious meeting this week, testing Chairman Jerome Powell's ability to secure the support of other policymakers for a third consecutive interest rate cut. The Fed's 19-member interest rate decision-making committee is deeply divided on whether to further lower borrowing costs. The complexity of the economic situation exacerbates this division: persistently high inflation typically leads the Fed to keep key interest rates unchanged, while weak employment and rising unemployment usually result in rate cuts.

First, some economists predict that at the Fed meeting on December 9-10, three officials may vote against a 25-basis-point rate cut that Powell might support, which would be the most dissenting votes in six years. Only 12 of the Fed's 19 members participate in the interest rate decision vote. Some non-voting officials have also expressed opposition to another rate cut. “The situation is indeed very tricky,” said William English, an economist at Yale School of Management and a former senior Federal Reserve official. “Even the most rational person might come to a different conclusion. Committees usually tend to reach a consensus, but in the current situation, it’s difficult to reach one.”

Secondly, the debate has intensified due to the lack of official federal employment and inflation data during the government shutdown, perhaps foreshadowing the Fed’s future direction after Powell steps down as chairman in May. His successor will be appointed by President Donald Trump, and is widely expected to be White House chief economic advisor Kevin Hassett. Hassett may push for a faster pace of interest rate cuts than other officials are willing to support.

Furthermore, the divergence may widen, which could be seen as a sign of healthy debate between different viewpoints. The Fed’s past tradition of near-unanimous decision-making has often been criticized as a manifestation of “groupthink.” However, some Fed officials warn that significant disagreement also has drawbacks. If the committee ultimately votes 8-4 or even 7-5, financial markets may lose confidence in the central bank’s next move.

However, most economists currently expect the Federal Reserve to adopt a so-called "hawkish rate cut," lowering interest rates while simultaneously signaling that it may maintain rates unchanged for some time to assess the health of the economy. Kansas City Federal Reserve President Jeffrey Schmid is expected to vote against maintaining rates for the second consecutive time. St. Louis Federal Reserve President Alberto Musaleem is likely to share his stance. Federal Reserve Governor Stephen Milan, hastily appointed by Trump in September, is likely to vote against a 0.5 percentage point cut in the Fed's benchmark interest rate for the third consecutive time.

However, following the Fed's last meeting on October 28-29, several policymakers indicated they favored maintaining rates at the December meeting, leading Wall Street investors to briefly lower the probability of a third rate cut to below 30%. But subsequently, New York Fed President John Williams stated that this year's rise in inflation appears to be a temporary fluctuation triggered by Trump's tariff policies, which he expects to subside by mid-2026.

Currently, Powell and many other Fed officials are more focused on hiring and unemployment than on inflation. Although the official jobs report was delayed, the unemployment rate rose slightly to 4.4% in September, marking the third consecutive monthly increase and reaching a four-year high. Concerns about a potential further deterioration in the job market are the main reason Federal Reserve officials expect a rate cut in December, but the cut may not be prolonged. At their meeting in late January, Fed officials will refer to three months of backlogged employment and inflation data. This data may show that inflation remains high, or it may show that the job market has rebounded, meaning further rate cuts are unnecessary.

Overall, the market widely expects that after this "precautionary" rate cut in December, the Fed's room for further rate cuts next year may be relatively limited. The path of monetary policy will be highly dependent on subsequent economic data, particularly the performance of inflation and the labor market. Meanwhile, the change in Fed leadership has added uncertainty to future policy.