The Fed is expected to cut interest rates by 25 basis points at its December 9-10 meeting.
A Reuters poll of more than 100 economists found an overwhelming majority expected the Fed to cut interest rates again to help the cooling labor market.
This expectation is consistent with the near 85% discount potential priced in the futures market. But despite this clear consensus among analysts, there are wide divisions within the Fed regarding its future decisions.
After the Fed decided to cut interest rates by 25 basis points at its October meeting, Fed Chairman Jerome Powell warned that inflation could rise again and said December’s policy was “not finalized.” Inflation, which has been above the 2% target since March 2021, and disruptions to the flow of economic data due to the 43-day government shutdown are among the factors underpinning Powell’s cautious message. Minutes from an October meeting revealed that opinions within the Federal Open Market Committee (FOMC) are sharply divided, with some members supporting keeping interest rates on hold while a minority are outright opposed to lowering them.
Despite this fragmented picture, 89 out of 108 economists (82%) surveyed between November 28 and December 4 expect a 25 basis point rate cut at the December meeting. Thomas Simmons, chief U.S. economist at Jefferies, said Powell’s hawkish tone in October was due to a lack of data, noting the data situation will be clearer in December. “Mr. Powell cannot repeat his claims because the necessary data is already available,” Simmons said. “Many members of the Board have also strongly indicated a rate cut in recent weeks.”
New York Fed President John Williams, as well as Michelle Bowman, Christopher Waller and Stephen Millan, have also called for rate cuts. Williams argued that rate cuts could be done without jeopardizing the inflation target and could act as insurance against a weakening labor market. However, five of the 12 voting members have publicly expressed opposition to further cuts.
The survey’s 2026 forecast also reflects conflicting opinions within the FOMC. The median forecast suggests two additional rate cuts next year, with the federal funds rate expected to return to a range of 3.00% to 3.25%, but not a clear majority on a quarterly basis. Economists say the uncertainty stems from fiscal risks created by the administration’s deep tax cuts and spending policies, questions over tariffs and political pressure that could threaten the Fed’s independence.
“Both the reflationary effect of large fiscal tax spending policies and the increased price stickiness of tariffs constrain the Fed’s actions in 2026,” said Kevin Gordon of the Schwab Research Center. Note that conflicting messages from FOMC members have also accelerated hedging in financial markets in recent weeks.
Another striking point of the survey was the large discrepancy between consumer and market inflation expectations. While the University of Michigan’s Consumer Forecast puts inflation near 4%, market-based indicators such as break-even rates and TIPS yields point to much lower levels. “This disconnect is something the Fed cannot ignore,” Gordon said. “Awareness of inflation remains a key concern for many Americans, especially affordability.”
The Fed’s preferred inflation measure, personal consumption expenditures (PCE), will remain above 2% through 2027, according to the median survey.
The U.S. economy grew 3.0% in the third quarter, but is estimated to slow to 0.8% this quarter. Economists expect growth to average 2% in 2025 and 2026.
*This is not investment advice.
