Economists Predict Rate Cut Amidst Internal Fed Disagreement
A strong majority of economists surveyed by Reuters anticipates that the Federal Reserve will cut its policy rate by 25 basis points at its upcoming December 9-10 meeting. This prediction is supported by the likelihood of an approximately 85% discount priced into futures markets. Despite this clear consensus among analysts, there is a significant divide within the Fed itself regarding the decision to be taken.
Following a 25 basis point cut at the October meeting, Fed Chair Jerome Powell issued a warning that inflation could potentially climb again, stating that the December move was not "finalized." Inflation has persistently remained above the 2% target since March 2021. Additionally, the disruption to economic data flow caused by the 43-day government shutdown are among the factors contributing to Powell's cautious stance. The minutes from the October meeting further revealed a sharp division within the Federal Open Market Committee (FOMC), with some members advocating for holding interest rates steady, while a few directly opposed the earlier cut.
Survey Data Highlights Broad Expectation for a December Cut
Out of 108 economists surveyed between November 28 and December 4, 89 (or 82%) anticipate a 25 basis point rate cut at the December meeting. Jefferies Chief U.S. Economist Thomas Simons noted that Powell's hawkish tone in October was attributed to a lack of available data, and suggested that the data landscape for December is much clearer. Simons commented, "The necessary data is now available, so Powell can't repeat the same argument. Many members of the Board have also strongly signaled a rate cut in recent weeks."
Key Figures Advocate for Rate Reduction
New York Fed President John Williams, along with other notable figures such as Michelle Bowman, Christopher Waller, and Stephen Miran, have expressed support for a rate cut. Williams argued that a rate cut could be implemented without jeopardizing the inflation target and could serve as a protective measure against a weakening labor market. However, it is important to note that five of the 12 voting members of the FOMC have publicly stated their opposition to further rate reductions.
Future Rate Expectations Reflect FOMC Division
The survey also highlighted divisions regarding expectations for 2026. While median estimates suggest two additional rate cuts next year, which would bring the federal funds rate back to the 3.00%-3.25% range, there is no clear quarterly majority for these actions. Economists attribute this uncertainty to several factors, including the fiscal risks stemming from the administration's significant tax cuts and spending package, ongoing questions surrounding tariffs, and potential political pressures that could challenge the Fed's independence.
Kevin Gordon of Schwab Research Center stated, "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." He also noted that conflicting messages from FOMC members have accelerated hedging activities in financial markets in recent weeks.
Divergent Inflation Expectations Pose a Challenge
Another notable finding from the survey was the sharp divergence between consumer and market inflation expectations. While consumer expectations, as measured by the University of Michigan, indicate inflation nearing 4%, market-based indicators such as breakeven rates and TIPS yields suggest a considerably lower level. Gordon remarked, "This disconnect is something the Fed cannot ignore. The perception of inflation remains a key concern for many Americans, particularly affordability."
According to the survey's median projection, the Personal Consumption Expenditures (PCE) index, which is the Fed's preferred inflation indicator, is expected to remain above 2% until 2027.
Economic Growth Projections
The U.S. economy is estimated to have grown at a rate of 3.0% in the third quarter, with expectations for growth to slow to 0.8% in the current quarter. Economists forecast that growth will average 2% in both 2025 and 2026.