A divided Fed is set to lower interest rates again, in one of its toughest calls

By Bryan Mena, CNN

Washington (CNN) — The Federal Reserve on Wednesday is set to lower borrowing costs again, even as stark divisions persist within the central bank’s powerful rate-setting committee.

Wednesday’s decision will likely emerge as the Fed’s toughest call since at least September 2024, when officials debated the size of that month’s rate cut.

Fed officials are in disagreement over which side of their dual mandate to prioritize: full employment or stable prices. Job growth this year has been unusually weak and several officials have said the situation could get worse if they don’t continue to lower rates. Other officials, however, say the greater risk is that inflation stays stuck above the Fed’s 2% target as President Donald Trump’s widespread tariffs pack a bigger punch.

This month’s meeting also represents Chair Jerome Powell’s last before his successor is identified. Trump said last week he knows who he’s going to nominate to be the next Fed chair and plans to make an announcement “early next year.” Powell’s term at the helm of the world’s largest economy ends in May, and the new chair is not typically nominated until spring. However, at Trump’s request, Treasury Secretary Scott Bessent has led a broad search for Powell’s replacement.

Further casting a shadow over this month’s meeting is the lack of key data on employment and inflation for October and November, which will be released in the coming weeks. The federal government last month began to release economic reports that had been delayed by the shutdown, but the data so far has done little to sway the Fed debate.

“No doubt there are differences in opinions at the Fed,” said Angelo Kourkafas, senior global investment strategist at Edward Jones. “So, their middle ground will be to deliver another cut as the market expects, but provide a fairly cautionary outlook for the path ahead.”

Fed officials will also release their “dot plot,” or updated economic projections, which will likely show just two rate cuts next year.

Tipping the scales

New York Fed President John Williams, serving in a role that’s historically closely aligned with the Fed chair, said in a November 21 speech that “downside risks to employment have increased… while the upside risks to inflation have lessened somewhat.”

“I still see room for a further adjustment in the near term,” Williams said at a central banking event in Chile. Investors’ bets for a December rate cut spiked to around 70% from 40% after Williams spoke.

Fed governors Christopher Waller, Michelle Bowman and Stephen Miran have continued to make the case that further rate cuts are warranted, though Miran takes it one step further, arguing the Fed should be cutting rates more aggressively.

“On the labor market, I don’t feel as confident we can get ahead of it,” San Francisco Fed President Mary Daly told the Wall Street Journal in an interview that published November 24. “It’s vulnerable enough now that the risk is it’ll have a nonlinear change.”

The September jobs report, released seven weeks after its originally scheduled date, showed that job growth picked up sharply that month; but the unemployment rate, which generally carries greater weight for central bank policymakers, moved higher. There have been several other signs of a weakening labor market, such as Americans taking longer to find a new job and job growth being driven by just a few industries over the past year.

Few cuts in 2026

The path ahead for interest rates is murky.

Over the past two years, Fed officials have lowered the key interest rate by 1.5 points. Those reductions were mostly in response to the labor market weakening. If Fed officials this month deliver a third consecutive rate cut as expected, it would bring their benchmark lending rate to its lowest level since October 2022.

But rate cuts can fuel inflation, which remains above the Fed’s 2% target. Higher price increases may persist in 2026 as tariff inflation reaches a peak, according to Bill Adams, chief economist at Comerica Bank. In the weeks following the Fed’s October decision, concerns about inflation dominated Fed officials’ public speeches, with several central bankers arguing that lowering rates too soon threatens the progress they’ve made in taming inflation.

Those officials include Dallas Fed President Lorie Logan and Cleveland Fed President Beth Hammack, both of whom become Fed voters next year. Among the Fed’s 12 regional bank presidents, only four get voting power each year on a rotating basis, in addition to the New York Fed president, who has a permanent vote.

“With two rate cuts now in place, I’d find it difficult to cut rates again in December unless there is clear evidence that inflation will fall faster than expected or that the labor market will cool more rapidly,” Logan said at a November 21 event in Zurich.

So far, Trump’s tariffs have pushed up inflation somewhat, but it’s been nowhere near the worst-case scenario economists had predicted. Fed officials have gradually embraced the idea of tariff inflation possibly being a one-time price level increase.

The Fed is set to announce its rate decision at 2 p.m. ET. and a press conference with Chair Powell follows at 2:30 p.m. ET.

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