Fed set for a third rate cut, but the path ahead remains uncertain

Persistent inflation, internal divisions and a lack of fresh data complicate Powell’s message as the US central bank approaches a pivotal decision without full consensus.

The Federal Reserve is preparing to deliver a third consecutive interest-rate cut, but the easing cycle may be nearing a pause. Internal tensions within the policy-setting committee reflect the difficult balance between supporting economic growth and confronting inflation that continues to run above the 2% target. After total rate reductions of 1.5 percentage points over the past 15 months, several officials fear that further cuts could overstimulate the economy. Others argue monetary policy remains restrictive. With new economic data scarce — partly due to the effects of the recent government shutdown — Chair Jerome Powell will be forced to “walk a fine line,” avoiding firm commitments on future moves.

The post-meeting statement is expected to reiterate that downside risks to the labor market have increased, while inflation remains “somewhat elevated.” Announced layoffs fell in November, yet major companies such as Amazon and Verizon have still outlined plans to cut jobs. Meanwhile, consumer spending has stagnated and the Fed’s preferred inflation gauge has risen to 2.8%. Analysts anticipate more cautious language, signaling a possible pause as policymakers wait for clearer data. Updated economic projections may show stronger growth in 2025 and slightly lower inflation by year-end, but also point to a modest rise in unemployment compared with earlier forecasts.

Adding to the meeting’s complexity is the growing risk of a split decision. Several regional Fed presidents have openly opposed further rate cuts, while others warn inflation is not yet under control. Multiple dissents are expected, with some policymakers favoring a more restrictive stance, while Governor Stephen Miran may again push for a larger, half-point reduction. Looming in the background is political uncertainty: investors are closely watching the White House for clues about President Trump’s choice to succeed Powell, with Kevin Hassett widely seen as the leading contender. All factors combine to make the Fed’s message more delicate than ever.

Andrea Pelucchi