The Fed is expected to cut the policy rate by 25 basis points at its December 9-10 meeting.
A strong majority of Reuters poll of more than 100 economists suggests the Fed will cut interest rates again to support a cooling labor market.
This expectation aligns with the likelihood of a near-85% discount priced in futures markets. However, despite this clear consensus among analysts, there is a significant divide within the Fed regarding the decision to be taken.
Following the 25 basis point cut at the October meeting, Fed Chair Jerome Powell warned that inflation could climb again and said the December move was not “finalized.” Inflation, which has remained above the 2% target since March 2021, and the disruption to economic data flow caused by the 43-day government shutdown are among the factors supporting Powell’s cautious message. The minutes of the October meeting also revealed a sharp divide within the Federal Open Market Committee (FOMC), with some members favoring holding interest rates steady, while a few directly opposed the cut.
Despite this fragmented picture, 89 of 108 economists surveyed between November 28 and December 4, or 82%, anticipate a 25 basis point rate cut at the December meeting. Jefferies Chief U.S. Economist Thomas Simons pointed out that Powell’s hawkish tone in October stemmed from a lack of data, and pointed to a clearer data landscape for December. “The necessary data is now available, so Powell can’t repeat the same argument,” Simons said. “Many members of the Board have also strongly signaled a rate cut in recent weeks.”
New York Fed President John Williams, along with figures like Michelle Bowman, Christopher Waller, and Stephen Miran, are also calling for a rate cut. Williams argued that a rate cut could be implemented without jeopardizing the inflation target and could act as insurance against a weakening labor market. However, five of the 12 voting members have publicly stated their opposition to further cuts.
The survey’s 2026 expectations also reflect the division within the FOMC. While median estimates suggest two additional cuts next year, pushing the federal funds rate back to the 3.00%-3.25% range, there’s no clear majority on a quarterly basis. Economists say this uncertainty stems from the fiscal risks created by the administration’s sweeping tax cuts and spending package, questions surrounding tariffs, and political pressures that could challenge the Fed’s independence.
Kevin Gordon of Schwab Research Center said, “Both the reflationary effects of the large tax-spending package on the fiscal side and the increased stickiness of goods prices caused by tariffs constrain the actions the Fed can take in 2026.” It is noted that conflicting messages from FOMC members have also accelerated hedging in financial markets in recent weeks.
Another striking point in the survey was the sharp divergence between consumer and market inflation expectations. While the University of Michigan’s consumer expectations see inflation near 4%, market-based indicators such as breakeven rates and TIPS yields point to a much lower level. “This disconnect is something the Fed cannot ignore,” Gordon said. “The perception of inflation remains a key concern for many Americans, particularly affordability.”
According to the survey median, the Personal Consumption Expenditures (PCE) index, the Fed’s preferred inflation indicator, will remain above 2% until 2027.
The US economy is estimated to have grown 3.0% in the third quarter, slowing to 0.8% this quarter. Economists expect growth to average 2% in both 2025 and 2026.
*This is not investment advice.
