Breitbart Business Digest: How Deeply Divided Is the Fed?

The Fed Will Cut Next Week

The Federal Reserve is all but certain to cut interest rates by 25 basis points next week, bringing the federal funds rate down to a range of 3.5 to 3.75 percent. Markets are pricing in an almost 90 percent probability of the move, and Fed chairman Jerome Powell has signaled as much in recent weeks.

But beneath this surface consensus lies the most divided Federal Open Market Committee in recent memory, a split that could have significant implications for monetary policy in 2026 and beyond.

As Treasury Secretary Scott Bessent recently reminded us, the Fed chairman gets just one vote on the Federal Open Market Committee (FOMC) that makes monetary policy. As a refresher, the FOMC consists of seven Fed Governors (including the chair), the New York Fed President, and four of the 11 Fed presidents.

While the majority of the board has always voted with the chairman, it’s not entirely clear that the dynamic is always the chair persuading the board rather than the board persuading the chair. Prudent chairs are unlikely to support a policy for which there is not majority support. This is not the Supreme Court, where the Chief Justice can find himself in the minority.

There are likely to be at least a couple of “hawkish” dissents from next week’s rate cut. Kansas City Fed President Jeffrey Schmid has signaled he favors a pause rather than a cut. Other possible dissenters could include Chicago’s Austan Goolsbee, Coston’s Susan Collins, and St. Louis’ Alberto Musalem. Fed Governor Michael Barr may also favor holding off on a cut until later.It’s unlikely that all five would dissent but two or three seems likely.

Governor Stephen Miran is likely to dissent, as well. He has favored larger cuts at the two previous meetings. It’s unlikely—but not completely beyond the realm of the possible—that he’ll be joined this time around by some of his fellow Fed governors. Possible other candidates for dovish dissents are Governors Michelle Bowman and Christopher Waller but they’re most likely to support the smaller cut.

The committee’s division reflects genuine uncertainty about the economy’s trajectory. This week we had the ADP private payrolls report show a contraction in employment in November while the weekly jobless claims came in below expectations, indicating a firmer labor market. The Department of Labor has said we’ll never get a household employment survey report (the one that includes the unemployment rate) for October and the official payrolls for October and November will be delayed until after the Fed meeting. The Atlanta Fed’s GDPNow has the economy growing at 3.8 percent in the third quarter, although the reliability of the measure is questionable given how many of the typical inputs have been delayed or missed due to the government shutdown.

The unemployment rate has ticked up over recent months. It’s likely that the Fed’s own Summary of Economic Projections (SEP) will show a forecast of it going even higher, to 4.6 percent. That would be a small increase from the median forecast of 4.5 percent in the September SEP and up from the 4.4 percent recorded in the September jobs report.

Powell’s Presser: A Hawkish Cut?

The real drama will unfold at Powell’s press conference. He faces three critical questions.

First, can he credibly frame this month’s cut as a hawkish move? Powell may feel the need to placate the hawks on the committee by signaling a lengthy pause after next week’s cut. But the week following the FOMC meeting brings a flood of crucial economic data: October and November payrolls, the November unemployment rate, October retail sales, and November inflation figures. With so much information arriving before the January meeting, markets will be looking for specific thresholds that would keep the Fed on hold and which might trigger another cut.

Second, is policy still restrictive? At 3.5-3.75 percent, with core inflation still running above target, Powell could argue that monetary policy is no longer particularly tight in real terms. On this question, it will be worth watching the SEP’s forecast of the longer-run federal funds rate. After staying at 2.5 percent from June 2019 to December 2023, this climbed to three percent in 2024. It’s very possible that the climb will resume in next week’s meeting, bringing the longer run forecast to 3.1 percent.

Third, how does Powell characterize the hawks’ concerns? Are they unconvinced that labor demand is weakening? That would put them at odds with most economists. Are they still worried about inflation effects from tariffs? Concerned that additional cuts might fuel “irrational exuberance” in the stock market? The answer matters for understanding where policy goes from here.

Adding another layer of complexity: Powell is increasingly seen as a lame duck. President Trump is expected to name Powell’s successor around the time of the January FOMC meeting, with White House economic advisor Kevin Hassett considered the leading contender. Once that announcement comes, markets will likely shift their focus to the incoming chair’s guidance rather than Powell’s.

Powell remains in charge through January, March, and April 2026 meetings, but the broader policy trajectory will be shaped by his successor. What’s more, Trump may also have two additional governor seats to fill, Powell’s and Lisa Cook’s. So by the middle of next year, the composition of the Fed may look very different than it is today.

A question Powell is sure to be asked at his press conference is whether he plans on stepping down from his governor position when his term as chairman ends. With one exception decades ago, this has been the practice of Fed chairs. But Powell has two years remaining in his term as governor and has repeatedly refused to say whether he will follow precedent.