The Federal Reserve is expected to cut interest rates at its final meeting of the year on Wednesday. Whether this marks the end of a series of reductions that began in September or whether borrowing costs will continue to fall is up for debate.
The Fed finds itself in a uniquely complicated situation. The economy is sending mixed signals, and it's not entirely clear whether officials should be more worried about inflation getting stuck above the central bank's 2 percent target or about the labor market suddenly weakening. The uncertainty has caused fierce divisions within the Fed and has puzzled Chairman Jerome H. Powell, who is under pressure on a variety of fronts.
The divide, which has deepened since the government shutdown delayed a range of key economic data, will manifest itself in a variety of ways on Wednesday.
Dealing with dissidents
The most obvious sign will be the official disagreements expressed by voting members of the policy body, the Federal Open Market Committee. Since July, the 12 participants, some of whom vote alternately, have struggled to reach consensus. There has been no unanimous vote since then, a rare sign of public dissent for Mr. Powell, who in the past has managed to get his colleagues to move as a unified group even when navigating difficult economic terrain.
The quarter-point cut in October saw disagreements in both directions. Stephen I. Miran, who joined the Fed earlier this year, wanted a larger rate cut of half a percentage point. He warned that the Fed was being too cautious about inflation and risked a recession if it didn't cut interest rates significantly. Jeffrey K. Schmid, president of the Kansas City Fed, took the opposite view and did not want the Fed to cut interest rates at all, arguing that inflation had remained above the Fed's 2 percent target for far too long.
A similar crack is likely to occur on Wednesday.
Those in favor of cuts have influential supporters, including John C. Williams, who as president of the Federal Reserve Bank of New York is a close ally of Mr. Powell. Several members of the powerful Board of Governors in Washington are also in favor of it. They argue that the labor market is fragile and are more concerned about a rise in unemployment than persistent inflation.
But the cohort of officials urging caution has also grown louder, raising the possibility of even greater divisions against cuts. In the weeks leading up to Wednesday's meeting, several voting members were clearly hesitant about whether the Fed would take further action, including Susan M. Collins, president of the Boston Fed, Austan D. Goolsbee of the Chicago Fed and Alberto G. Musalem of St. Louis.
But perhaps the loudest opposition came from officials who will vote on the policy next year. They include Beth M. Hammack, who runs the Cleveland Fed, and Lorie D. Logan of the Dallas Fed. That could mean that the hurdle to further rate cuts may be difficult to overcome if unemployment doesn't rise. It also suggests that whoever replaces Mr. Powell as Fed chief when his term ends in May will likely struggle to impose significantly lower borrowing costs than the economic environment requires.
Deciphering the “Dot Plot”
Economic forecasts released by the central bank on Wednesday are likely to highlight Fed factions. The focus will be on the “dot plot,” a chart that summarizes what all 19 officials forecast for borrowing costs in the coming years.
A quarter-point cut this week would bring interest rates down to a new range of 3.5 percent to 3.75 percent. The first pressing question is how many “soft disagreements” there will be for 2025. In this case, that would mean that officials are forecasting that interest rates will be at the previous level of 3.75 to 4 percent by the end of the year, indicating that they are not comfortable with a cut. Economists at Goldman Sachs expect five officials to offer mild dissent.
The second pressing question is how many cuts are planned for next year. In September, the last time the Fed released a dot chart, most policymakers forecast only a quarter-point cut after the trio delivered in 2025. That forecast is likely to hold true Wednesday, in part because the central bank has had limited access to data in recent months due to the government shutdown.
A flurry of official data is scheduled to be released in the week after the meeting, including November's labor market report and consumer price index report. If there are clear signs that the labor market is weakening, that could prompt some officials to soften their stance and advocate the need for interest rate cuts next year.
Keep options open
The Fed could give itself more flexibility in its interest rate plans by also updating its policy statement, which will be released on Wednesday.
In October, the Fed said it would assess incoming economic data, the evolving outlook and the balance of risks between its twin goals of a healthy labor market and low, stable prices “by considering additional adjustments” to interest rates.
As the Fed laid the groundwork last year to suspend cuts after a series of cuts that began in September, the central bank adjusted the wording of its policy statement and said it would take these developments into account when determining the “size and timing of additional adjustments.” Many economists expect the Fed to revisit this language.
Mr. Powell will also have an opportunity to set expectations during his press conference, which will take place shortly after the rate decision. At the last meeting, the chairman was unusually outspoken about the disagreements that had emerged among his colleagues, which at the time raised questions about whether the central bank would cut this month. He noted that not only did people think differently about the economic outlook, but they also had different risk tolerances when it came to the labor market and inflation.
Mr. Powell is likely to repeat these points on Wednesday and not rule anything out.