Divided US Fed set for contentious interest rate meeting
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When the Fed last met in October, chair Jerome Powell asserted that another rate cut in December was “not a foregone conclusion”.
PHOTO: BLOOMBERG
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- The US Federal Reserve faces division over a potential third interest rate cut, with markets anticipating it despite conflicting views and limited economic data.
- Delayed data due to a government shutdown hinders the Fed's assessment, creating a "paradoxical situation" where decisions are made with scarce information, says EY-Parthenon.
- Trump's criticism of Powell and potential appointment of Hassett as chair raises concerns about political interference, but institutional constraints might limit its impact.
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WASHINGTON – While the US Federal Reserve’s final interest rate meeting in 2025 could see an unusual amount of division, financial markets view a third straight interest rate cut as nearly certain.
When the Fed last met in October, chair Jerome Powell asserted that another rate cut in December was “not a foregone conclusion”, pointing to “strongly differing views” within the central bank.
Minutes from the Fed’s most recent meeting showed many officials expect a further uptick in underlying goods inflation as President Donald Trump’s tariffs bite.
But recent comments from leading Fed officials also reflected support for cutting again because of a weakening labour market, even though inflation is still above the Fed’s 2 per cent target.
Next week’s outcome in the “deeply divided” Fed is “too close to call”, UniCredit said, while also acknowledging that favourable comments from New York Fed bank chief John Williams towards a cut are a notable “intervention”.
“As one of the most senior members of the (Fed committee), it seems unlikely Williams would have said this without Powell’s prior approval,” UniCredit said.
Policymakers generally hold rates at a higher level to tamp down price increases, but a rapidly deteriorating jobs market could nudge them to slash rates further to boost the economy.
“Usually, as you get closer to a policy meeting, it becomes quite apparent and transparent what the Federal Open Market Committee is going to do,” said Nationwide chief economist Kathy Bostjancic, referring to the Fed’s rate-setting committee.
“This time is very different,” she told AFP in late November.
Financial markets rallied following Mr Williams’ statement on Nov 21 that rates could go lower in the “near term”.
Futures markets currently show more than 87 per cent odds that the Fed will cut rates to between 3.50 per cent and 3.75 per cent, according to CME FedWatch.
Dearth of data
The Fed moved into rate-cutting mode this autumn, with rate cuts both in September and October.
But a government shutdown from Oct 1 through Nov 12 sapped the central bank of most of the key data points for assessing whether inflation or employment is now the bigger priority.
The latest available government data showed the jobless rate crept up from 4.3 per cent to 4.4 per cent in September, even as hiring beat expectations.
While delayed publications on September’s economic conditions have trickled out, the US government has cancelled full releases of October jobs and consumer inflation figures because the shutdown hit data collection.
Instead, available figures will be published with November’s reports, but only after the Fed’s upcoming rate meeting.
The US personal consumption expenditures price index rose to 2.8 per cent on an annual basis in September, from 2.7 per cent in August, according to delayed data released on Dec 5.
The “Fed faces a bit of a paradoxical situation”, said EY-Parthenon chief economist Gregory Daco. “The Fed says these decisions will be data-dependent, but there isn’t a lot of data to go on.”
Mr Daco expects a “weak majority” to favour another interest rate cut, but believes there could be multiple dissents.
Looking beyond Powell
Besides Dec 10’s decision, the Fed will also release projections for its 2026 economic and monetary policy outlook.
2026 will already mark a period of significant change with the conclusion of Mr Powell’s tenure as chair in May.
Mr Trump, who has relentlessly criticised Mr Powell for not cutting rates more aggressively, signalled this week that his chief economic adviser Kevin Hassett could succeed Mr Powell.
Mr Hassett has appeared to be in lockstep with Mr Trump on key economic questions facing the Fed. But if appointed, he could also face pressure from financial markets to buck the White House on interest rates if inflation worsens.
“The institutional constraints often end up leading appointees towards some level of political independence,” said Mr Daco, noting that decisions require a board majority.
Whoever Mr Trump picks will need to be confirmed in the US Senate.
While UniCredit predicted that “political interference will have a modest impact on Fed policy”, deeper consequences cannot be ruled out. “We have not assumed Trump will get de-facto control of the Fed,” UniCredit said, adding that such an outcome is “a non-negligible risk”. AFP
