San Francisco Frontiers - US Fed appears set for third rate cut despite sharp divides

Financial markets expect a third straight 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 divides within the Fed have grown even as policymakers voted to slash rates twice in recent months to boost the weakening employment market.

"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 the costs of goods have risen on the back of Trump's wide-ranging levies this year, and some officials are cautious that higher prices could become persistent.

The Fed pursues maximum employment and stable prices as it decides the path of interest rates, although the 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.

This comes as 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 world's biggest economy.

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

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' 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 rate cut.

- Litmus test -

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

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

Asked if this was a "litmus test" for his handpicked candidate, Trump responded "yes."

Powell's term as Fed chair ends in May 2026, and Trump has hinted that he wants to nominate his chief economic adviser Kevin Hassett to the top post.

Hassett currently chairs the White House National Economic Council, and appears to be in lockstep with the president on key economic questions facing the Fed.

If appointed, however, Hassett could also face pressure from financial markets to diverge from the White House on interest rates -- particularly if inflation worsens.

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

Cook challenged her ousting, and the Supreme Court barred the president from immediately removing her while awaiting oral arguments on the case in January.

G.Miller--SFF