Fed Officials Are Torn Over December Rate Cut

A December interest rate cut that traders had viewed as a near-certainty no longer appears guaranteed. Federal Reserve officials are locked in a heated debate over whether to cut interest rates at their last meeting of the year, exposing a rare internal split over the central bank's next move, the Wall Street Journal reports. The disagreement centers on whether the bigger threat is stubborn inflation or a weakening job market. This divide has thrown what once seemed like a straightforward path to more rate cuts into uncertainty, though some 80% of economists polled by Reuters expect a quarter-point rate cut.

In September, a slim majority of Fed policymakers supported additional cuts for October and December, which would mark three consecutive reductions. But after last month's rate cut, dissent from hawkish officials seeking a pause grew louder, especially with the government shutdown halting the release of key economic data.

The unusual mix of rising inflation and flat job growth—what some call stagflation—has made forecasting difficult. The last official data put inflation at 2.9%, above the Fed's 2% target, while job growth slowed sharply. The Fed's preferred measure of inflation has been above 2% for four years, the longest such stretch since 1995. "It could impact Fed credibility that we've had inflation above target for a long period of time. It's one of those factors people may not notice, may not pay attention to, and then they do all at once," Josh Hirt, senior economist at Vanguard, tells Reuters. "We will take a little bit more caution around viewing tariff inflation purely as temporary."

story continues below

As the Dec. 9-10 meeting approaches, the decision on another cut is still up in the air. Some officials see December and January as "interchangeable," per the Journal, with one option being a December cut coupled with tougher criteria for future reductions. "People just have different risk tolerances," Fed chair Jerome Powell said last month. "So that leads you to people with disparate views." A December rate cut, he said, was far from a foregone conclusion.