Stubborn inflation and internal divisions, will the Federal Reserve hit the "pause button" after tonight's interest rate cut?

In the early hours of Thursday Beijing time, the Federal Reserve is expected to cut interest rates again, but this is likely to be the last rate cut in the near term. Ongoing inflation concerns are causing deep divisions within the Fed, which will prevent Chairman Jerome Powell from signaling further rate cuts early next year.

With inflation remaining above target and the lack of key economic data further complicating Powell's efforts to build consensus, the labor market data for November will not be released until December 16 due to the government shutdown that persisted throughout most of October and November, and inflation data will be published two days later. Analysts point out that the conflicting signals from economic data put the Fed in a position where it must "walk a tightrope."

At the same time, after a cumulative rate cut of 1.5 percentage points over the past 15 months, the federal funds rate is approaching a level that could stimulate economic activity—something many officials are trying to avoid. Some officials believe that the current rate is at a neutral level that neither stimulates nor suppresses growth, while the divergent views on how tight monetary policy actually is may lead to a split vote at this meeting, with some analysts expecting as many as three dissenting votes.

At 2 PM Eastern Time on Wednesday (3 AM Beijing time on Thursday), the Fed will announce its rate decision, along with a monetary policy statement, dot plot, and new economic forecasts. Powell will hold a press conference 30 minutes later.

The policy statement may signal a "pause"

Against the backdrop of mixed economic data, the Fed is expected to reiterate in its statement that the "downside risks to employment have increased in recent months," and inflation "remains slightly elevated."

The number of layoffs in November has decreased, but large U.S. companies like Amazon and Verizon have announced layoff plans. Consumer spending was essentially flat in September, while the Fed's preferred inflation measure rose to 2.8%, nearly 1 percentage point above the 2% target.

Diane Swonk, Chief Economist at KPMG, stated: "This puts the Fed in a position where it must walk a tightrope." She noted that Powell cannot guarantee the next steps during the press conference, "He must represent a range of views that span from one extreme to the other, which is a more difficult message to convey."

Analysts expect that some policymakers will also express uncertainty about the possibility of additional rate adjustments in the coming months in the statement. Swonk said:

"My sense is that they will pause and wait for more data, as they have already injected some rate cuts into the system."

The focus of this meeting will quickly shift to the median forecast for the policy benchmark interest rate at the end of 2026, known as the dot plot. If the forecasts for further rate cuts decrease, it will make it more difficult for Powell's successor to push for further easing policies.

Analysts point out that if Fed officials lower their expectations for further rate cuts, it will make it harder for Powell's successor to build a majority support within the committee to promote the further easing policies called for by Trump.

At the same time, the Fed's new economic forecasts will continue to show divisions among policymakers.

The September forecasts indicated that eight officials leaned towards the view that rates would not be lower than the level after this rate cut by 2026, while nine officials expected at least two more rate cuts would be needed Economists expect the committee's median forecast for growth in 2025 may be revised upward, while the inflation outlook for the end of this year may be slightly downgraded. The unemployment rate expectation for next year is higher than the September forecast.

Several Officials May Vote Against

Powell has not publicly spoken since the interest rate decision in October and is expected to face a more divided committee. Several regional Federal Reserve presidents have openly opposed further rate cuts, while other officials have expressed concerns about the potential impact of additional adjustments on the economy.

Many analysts believe that Kansas City Fed President Jeff Schmid and St. Louis Fed President Alberto Musalem will vote against rate cuts and support keeping rates unchanged.

Boston Fed's Susan Collins, Chicago Fed's Austan Goolsbee, and Fed Governor Michael Barr have all expressed concerns about inflation since the last meeting.

According to an article from Wall Street Journal, on November 21, the Fed's "number three," New York Fed President John Williams, alleviated investors' concerns about a rate cut at this meeting. Williams, seen as aligned with Powell's stance, stated that there is still "room" for another rate cut "in the near term," increasing market bets on a rate cut.

Fed Governor Stephen Miran is expected to vote in favor of a larger half-percentage point rate cut, as he did in the previous two meetings.

In addition, investors are closely watching whether the White House will announce Trump's choice for Powell's successor after his term expires in May. Trump's National Economic Council Director Kevin Hassett is seen as the frontrunner, although the formal nomination may not come until early next year