With the Federal Open Market Committee set to conclude its two-day policy meeting later today, markets are assigning a near-100% probability to a second consecutive 25 basis point interest rate cut.
The federal funds rate is currently targeted between 4%-4.25%.
Ongoing debate within the Fed
While the rate cut appears nearly certain, significant debate remains regarding the pace and future direction of monetary policy.
Former Fed official Bill English noted the internal disagreement:
“There’s dissent between people who want to cut now, and people who want to wait and see a bit more.”
Governor Stephen Miran is expected to push for a larger cut, as he did in September, while several regional Fed presidents have signaled reluctance to accelerate reductions.
Chair Jerome Powell is anticipated to maintain a cautious stance, avoiding commitments on future moves, especially regarding a potential December cut.
Labor market and data challenges
Concerns about the labor market are a driving factor behind the Fed’s dovish tilt, even as official data remains limited due to the recent government shutdown.
Economist Luke Tilley predicts ongoing cuts:
“We expect 25 [basis points Wednesday] and then again in December, and then again in January and March and April.”
The shutdown has complicated the Fed’s dual mandate, as policymakers lack crucial employment figures, increasing uncertainty about the path forward.
Quantitative tightening nearing its end
Attention is also on the Fed’s $6.6 trillion balance sheet, as officials consider when to end the ongoing runoff of Treasurys and mortgage-backed securities—a process known as quantitative tightening (QT).
Powell recently suggested QT could conclude soon, with markets awaiting either an announcement or guidance on the timing.
