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- FOMC policymakers were divided over the need for another rate cut, with skepticism rising about reducing rates in December despite the previous rate cut in October.
- Market expectations for a rate cut have collapsed, dropping from nearly fully priced in, to sharply lower as FOMC members remain deeply divided.
- Missing data and divided FOMC opinions have made forecasting significantly more difficult.
FOMC meeting minutes released on November 19th showed that policymakers were divided during their October meeting over whether the Fed should continue to cut interest rates. Some policymakers saw weaknesses in the labor market as a big threat, while others warned that persistent inflation remains the primary risk.
Despite a rate cut being unanimously approved in the October meeting, the path ahead remains uncertain, especially for the upcoming meeting in December.
Shift from a December Cut
Several officials assessed that a further reduction of interest rates could well be appropriate in December if the economy evolved as they expected. Many officials suggested that, under their economic outlooks, it would likely be appropriate to keep interest rates unchanged for the rest of the year.” ⁽¹⁾
Market pricing changed quickly, even before the minutes, as traders had been nearly fully pricing in a rate cut in December. This week, the probability fell from 93.7% in October to 29.6% currently. ⁽²⁾
Fed Chair Jerome Powell had already hinted at caution in his post-meeting press conference back in October, saying a December cut was not a “foregone conclusion.” The minutes confirmed that “participants expressed strongly differing views” about the right decision for December.
Deep Divisions Inside the Committee
The 10-2 vote to cut rates in October masked much broader disagreement. Many favored the cut but were also worried about inflation that showed little effort to return to the Fed’s 2% target. Several members were openly against lowering interest rates. ⁽³⁾
At the core of the debate was how restrictive current policy actually is. Some argued that even after the cut, rates remain high enough to restrain growth. Others pointed to the economy’s resilience as evidence that policy is no longer very restrictive. ⁽⁴⁾
Public statements were made by FOMC officials, where governors Miran, Waller, and Bowman leaned toward rate cuts to support labor market growth. Other members, such as Schmid, Collins, and Musalem, worry that inflation might rise again if interest rates are lowered. Chair Powell, Vice Chair Jefferson, and New York Fed President Williams remained cautious, with the need to assess upcoming data. ⁽⁵⁾
Missing Data from the Government Shutdown
The Fed’s decision-making process was complicated even more due to the 44-day government shutdown, which delayed the release of economic reports. Chair Powell described it as “driving in the fog,” though Governor Waller later pushed back, insisting the Fed still had sufficient private and real-time data to act.
Balance Sheet Decision: Quantitative Tightening Ends
One thing that the committee agreed on is to pause the reduction of its Treasury and mortgage-backed securities holdings starting in December. The process is widely known as quantitative tightening, which has already reduced the Fed’s balance sheet by more than $2.5 trillion, with policymakers appearing supportive of halting it. ⁽⁶⁾
