Federal Reserve Poised to Cut Interest Rates by 25 Basis Points

The Federal Reserve is poised to cut interest rates by 25 basis points next week, lowering the federal funds rate to a range of 3.5 to 3.75 percent. Markets are pricing in a 90 percent probability of this move, as indicated by Fed chairman Jerome Powell in recent statements.

However, the Federal Open Market Committee is experiencing significant divisions, which could impact future monetary policy into 2026. Treasury Secretary Scott Bessent noted that the Fed chairman holds just one vote on the FOMC, which includes seven Fed Governors, the New York Fed President, and four of the 11 Fed presidents.

While the chairman typically has majority support, it remains uncertain whether Powell is swaying the board or vice versa. At least a couple of hawkish dissents are expected during the upcoming vote, with Kansas City Fed President Jeffrey Schmid advocating for a pause instead of a cut.

Potential dissenters also include Chicago's Austan Goolsbee, Boston's Susan Collins, and St. Louis's Alberto Musalem. The Fed's division reflects genuine uncertainty about the economy, with mixed signals from recent labor market reports and GDP projections.

The ADP private payrolls report suggested a contraction in employment, while jobless claims indicated a firmer labor market. The Atlanta Fed's GDPNow model estimates third-quarter growth at 3.8 percent, although the reliability of this figure is questioned due to data delays.

The unemployment rate is anticipated to rise to 4.6 percent in the Fed's Summary of Economic Projections, up from 4.5 percent in September. At Powell's upcoming press conference, he will have to navigate critical questions on whether the rate cut can be framed as hawkish and if current policy remains restrictive, especially with core inflation still above target.

The outlook for the longer-run federal funds rate may also be addressed, which could climb from 2.5 percent to 3.1 percent. Additionally, Powell's status as a lame duck could influence market focus, especially with expectations of President Trump's announcement for a new Fed chair before the January meeting.

The composition of the Fed could change significantly by mid-next year, with two additional governor seats potentially filled by new appointees. Powell's future as a governor remains uncertain, as he has not confirmed whether he will step down after his term as chairman ends.