At October’s Federal Reserve policy meeting, Chair Jerome Powell issued a warning to those who thought the central bank had entered an easing cycle: “A further reduction in the policy rate at the December meeting is not a foregone conclusion, far from it.”
That alarm bell turned out to be somewhat exaggerated. A quarter-point rate cut at Wednesday’s Fed meeting, the third cut this year bringing rates to between 3.50%-3.75%, is the closest thing to a settled question. What comes next is not.
The Fed’s latest economic projections, also due out Wednesday afternoon, will show how much room officials believe they have to lower rates in 2026, a year that will be dominated by the debate between policymakers who see the economy cooling and those who fear easing rates too soon will reignite inflation.
In September, most officials projected just one cut in 2026, breaking from Wall Street analysts who were expecting two more cuts at the time. Officials’ projections highlighted a wide spread that exposed disagreement inside the committee.
Economists expect this week’s update to remain close to that shallow path. If the projections again show only one or two cuts in 2026, the Fed will be signaling that it intends to ease policy cautiously rather than pursue the more ambitious cutting cycle investors had expected.
Disagreements around rate cuts at the December meeting may also show how divided the Fed is on the policy path ahead. Kansas City Fed President Jeff Schmidt dissented from November’s rate cut and argued that the central bank should pause.
Several other officials have sounded a similar note in recent weeks. The government shutdown has delayed the release of October and November’s employment and inflation reports, leaving policymakers without key data that usually guides their decisions. St. Louis Fed President Alberto Musalem, Chicago Fed President Austan Goolsbee, and Boston Fed President Susan Collins have all noted this gap and said they are cautious about easing in this foggy environment. Minutes from the October meeting showed that many officials questioned whether another cut this year was appropriate. It is possible that there will be more than one dissent calling for a pause on Wednesday.
Still, a slight majority of policymakers have indicated that the Fed should act now. Governors Christopher Waller, Michelle Bowman, and Stephen Miran have supported further rate cuts and New York Fed President John Williams said late last month that there is “room for a further adjustment in the near term.”
Their argument is grounded in data that suggest the labor market is losing momentum. The unemployment rate reached 4.4% in September. Job openings have fallen by more than one million this year. Wage growth in private sector measures has slowed. The Atlanta Fed’s wage tracker has fallen from a peak near 7% in 2022 to just above 4%. Indeed’s wage tracker shows a similar decline. Real personal income, excluding government transfers, has been relatively flat since April.
Officials who oppose another cut see a different economy. Stock indexes sit near record highs. Corporate credit spreads remain tight, near historical lows. Gross domestic product growth is still strong. Wage growth near 4% still exceeds the level that many policymakers associate with stable inflation, and price increases have remained above the Fed’s 2% target for nearly five years. These officials worry that lowering rates again could slow progress on inflation and fuel financial imbalances.
These competing readings of the same data explain why December’s projections and the vote count matter so much. A limited path of cuts through 2026, combined with more than one dissent in December, would show that officials view Wednesday’s move as an insurance cut rather than the start of a longer easing cycle. Many economists now believe the Fed will wait until March before considering another rate cut. That timing would allow policymakers to review complete inflation and labor market data for the winter and to assess whether the recent slowdown in hiring and spending is continuing.
Investors will pay close attention to Powell’s explanation of how the Fed weighed these choices while missing months of crucial data. The quarter-point cut may be expected, but the projections and the level of disagreement behind the decision will reveal far more about the Fed’s plans for the year ahead. Powell will have the difficult task of signaling that the Fed remains hawkish while taking dovish actions and setting expectations for January and beyond.