San Francisco Frontiers - US Fed expected to make third straight rate cut despite divisions

Financial markets expect a third consecutive 25 basis points reduction, bringing levels to a range between 3.50 percent and 3.75 percent. This would be the lowest in around three years.

But fissures within the Fed have grown even as policymakers slashed rates twice in recent months to boost the weakening employment market -- and the central bank faces a turbulent year ahead.

Officials opened their second day of deliberations at 9:00 am (1400 GMT), with their decision to be unveiled later Wednesday.

"We look for at least two dissents in favor of no action and one in favor of a larger cut," said Michael Feroli, chief US economist at JP Morgan.

"There are almost equally compelling reasons to cut and to hold," he added in a recent note.

The Fed's rate-setting committee consists of 12 voting members -- including seven members of the board of governors, the New York Fed president and a rotation of reserve bank presidents -- who take a majority vote in deciding the path of rates.

Powell noted in October that inflation separate from President Donald Trump's tariffs is not too far from officials' two-percent target.

But goods costs have risen on Trump's sweeping levies, and some officials are concerned that higher prices could become persistent.

The Fed pursues maximum employment and stable prices, although these goals can sometimes be in conflict. Lower rates typically stimulate the economy while higher levels hold back activity and tamp down inflation.

- 'Risk management' -

Powell will likely be able to "persuade several hesitant policymakers to support a third consecutive 'risk management' rate cut," said EY-Parthenon chief economist Gregory Daco.

The most recent available figures confirmed a slowdown in the jobs market, while a government shutdown from October to mid-November delayed the publication of more updated federal data.

But Daco also expects Powell to signal "firmly that additional easing is unlikely before next spring," unless there is material weakening in the economy.

This is because rates are close to "neutral," a level that neither stimulates nor restricts economic activity.

Feroli of JP Morgan observed that most Fed governors appear to favor lowering rates, while most reserve bank presidents seem inclined to keeping them unchanged.

But New York Fed President John Williams's remarks that there was room for another cut in the near-term tilts the balance.

"We believe he was speaking for the rest of the leadership," Feroli said, referring to Powell and Vice Chair Philip Jefferson. "This should weigh the votes firmly toward a cut."

Meanwhile Fed Governor Stephen Miran, who is on leave from his role heading the White House Council of Economic Advisers, is expected to push for a larger cut.

- Political pressure -

This week's gathering is the last before 2026, a year of key changes for the Fed -- including the accession of a new chief and tests of the central bank's independence as political pressure mounts.

In a Politico interview published Tuesday, Trump signaled he would judge Powell's successor on whether they immediately cut rates.

Interviews for his choice are entering the final stages, and Powell's term as Fed chair ends in May.

Trump earlier hinted he wants to nominate his chief economic adviser Kevin Hassett.

Other top contenders include former Fed official Kevin Warsh, Fed governors Christopher Waller and Michelle Bowman, and Rick Rieder of BlackRock.

Hassett chairs the White House National Economic Council and appears to be in lockstep with the president on key economic issues.

Miran's term as governor also ends in January, creating an opening among top Fed officials. And Trump has sought to free up another seat in attempting to fire Fed Governor Lisa Cook this year.

Cook challenged her ousting, and the Supreme Court awaits oral arguments in the case in January.

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