WASHINGTON (AP) — What was previously seen as a near-certainty of interest rate cuts next month now looks more like a coin toss, with Federal Reserve officials sharply divided over the state of the economy and whether stubborn inflation or weak jobs pose a greater threat.
In several speeches over the past week, some policymakers have registered more concern about persistent inflation, echoing the “affordability” concern that played a large role in the election earlier this month.
At the same time, the other camp is much more concerned about low hiring and the threat that the “low-wage, low-work” labor market could deteriorate into one of increasingly widespread layoffs.
The confusion within the Fed’s 19-member rate-setting committee reflects a highly uncertain economic outlook driven by a host of factors, including tariffs, artificial intelligence and changes in immigration and tax policies.
“It reflects a lot of uncertainty,” said Luke Tilley, chief economist at M&T Bank. “It’s not at all surprising that opinions differ greatly.
If the Fed cuts interest rates, the cost of borrowing for homes and cars could rise. More expensive mortgages and car loans contribute to a widespread view, according to polls, that the cost of living is too high.
Some Fed observers say that during December 9-10 meeting, there is an unusually high degree of disagreement over whether the central bank will cut interest rates or not. Krishna Guha, an analyst at Evercore ISI, said a decision to cut could lead to as many as four or five disagreements, while a decision to leave rates unchanged could lead to three.
Four dissenting votes would be highly unusual given the Fed’s consensus-seeking history. The last time the four officials disagreed was in 1992, when then-chairman Alan Greenspan.
Fed Governor Christopher Waller noted on Monday that critics of the Fed often accuse him of “groupthink” because many of his decisions are made unanimously.
“People who accuse us of this, get ready,” Waller said in London on Monday. “You might see the least band you thought you’d seen… in a long time.”
The spread has been widened by a government shutdown that has cut economic data, a particular challenge for the Fed, which Chairman Jerome Powell has often described as “data dependent.” The last government jobs report was in August and inflation was in September.
September The jobs data will finally be released on Thursday and is expected to add 50,000 jobs in the month, with the unemployment rate unchanged at 4.3%.
So far, Wall Street investors are 50-50 predicting a rate cut in December, according to CME Fedwatch, down sharply from nearly 94% a month ago. The decline contributed to stock market falls this week.
After cutting the benchmark interest rate for the first time this year in September, Fed policymakers said they expect to cut twice more in October and December.
However, on October 29 after making the second cut, Powell poured cold water on the prospects for another cut, describing it as “a foregone conclusion – far from it”.
And last week, speeches from several regional Fed officials further reduced the likelihood of market tapering in December. Susan Collins, president of the Federal Reserve Bank of Boston, said, “In all my conversations with contacts throughout New England, I hear concerns about higher rates.”
Collins said keeping the Fed’s benchmark interest rate at its current level of around 3.9% would help reduce inflation. She added that the economy has “held up pretty well” even with interest rates as they are.
Several other regional presidents expressed similar concerns, including Raphael Bostic of the Atlanta Fed, Alberto Musalema of the Federal Reserve Bank of St. Louis and Jeffrey Schmid of the Kansas Fed. Musalem, Collins and Schmid are among 12 officials voting on policy this year. Schmid refused to leave interest rates unchanged in October.
“When I talk to contacts in my area, I hear constant concern about the pace of price increases,” Schmid said Friday. “Some of it has to do with the impact of tariffs on input prices, but people are worried about more than just tariffs, or even primarily tariffs. I hear concerns about rising health care costs and insurance premiums, and I hear a lot about electricity.”
But Waller said on Monday that sluggish hiring was a bigger concern and reiterated his call for rate cuts next month.
“The labor market is still weak and almost at a standstill,” he said. “Inflation continued to show relatively little impact from tariffs through September, supporting the hypothesis that tariffs… are not a permanent source of inflation.”
Waller also dismissed concerns raised by Schmid and others that the Fed should keep interest rates high because inflation has exceeded the Fed’s 2% target for five years. So far, that hasn’t fueled public concern that inflation will remain high for a long time, Waller noted.
“You can’t just say it’s five years over target, so I’m not going to cut back,” he added. “You have to give us better answers.”
Esther George, the former president of the Kansas City Fed, said there may be a consensus for a rate cut if, say, new data from October and November show the economy has lost jobs.
It’s also worth noting that many economists expected a few dissents in September, but only Stephen Miran, the governor appointed by President Donald Trump that month, voted against the decision to cut interest rates and in favor of even more cuts.
“Registering dissent is a difficult decision, and I think you’ll find people speaking today who wouldn’t vote that way,” she said. “I think you’ll find enough consensus no matter how they go.”
