Fed Set to Cut Rate, May Signal Pause  12/09 06:02

   The Federal Reserve faces an unusually contentious meeting this week that 
will test Chair Jerome Powell's ability to corral the necessary support from 
fellow policymakers for a third straight interest rate cut.

   WASHINGTON (AP) -- The Federal Reserve faces an unusually contentious 
meeting this week that will test Chair Jerome Powell's ability to corral the 
necessary support from fellow policymakers for a third straight interest rate 
cut.

   The Fed's 19-member rate-setting committee is sharply divided over whether 
to lower borrowing costs again. The divisions have been exacerbated by the 
convoluted nature of the economy: Inflation remains elevated, which would 
typically lead the Fed to keep its key rate unchanged, while hiring is weak and 
the unemployment rate has risen, which often leads to rate cuts.

   Some economists expect three Fed officials could vote against the 
quarter-point cut that Powell is likely to support at the Dec. 9-10 meeting, 
which would be the most dissenting votes in six years. Just 12 of the 19 
members vote on rate decisions. Several of the non-voting officials have also 
said they oppose another rate cut.

   "It's just a really tricky time. Perfectly sensible people can reach 
different answers," said William English, an economist at the Yale School of 
Management and a former top Fed staff member. "And the committee kind of likes 
to work by consensus, but this is a situation where that consensus is hard to 
reach."

   The debate, which has also been fueled by a lack of official federal data on 
employment and inflation during the government shutdown, could be a preview of 
where the Fed is headed after Powell's term as chair ends in May. His successor 
will be appointed by President Donald Trump and is widely expected to be Kevin 
Hassett, the top White House economic adviser. Hassett may push for faster cuts 
than other officials would be willing to support.

   English said the potential for greater disagreement could be seen as a sign 
of healthy debate between different views. The Fed's tradition of reaching 
unanimous or nearly-unanimous decisions has often been criticized as evidence 
of "groupthink." Yet some Fed officials warn that there are downsides to sharp 
splits. If the committee votes end up as 8-4 or even 7-5, then financial 
markets could lose confidence in where the central bank is headed next.

   Fed Governor Christopher Waller, for example, has said that in the case of a 
7-5 vote, if just one official changed their view, it could bring about a 
significant shift in Fed policy.

   For now, however, most economists expect what's called a "hawkish cut" -- 
the Fed will reduce rates, while also signaling that it may stand pat for some 
time to assess the economy's health. ("Hawks" refer to officials who generally 
support higher rates to combat inflation, while "doves" more often support 
lower rates to boost hiring).

   The president of the Kansas City Federal Reserve Bank, Jeffrey Schmid, is 
expected to dissent for a second straight meeting in favor of keeping rates 
unchanged. He may be joined by St. Louis Fed president Alberto Musalem. Fed 
governor Stephen Miran, who was hurriedly appointed to the Fed's board by Trump 
in September, will likely dissent for a third straight meeting in favor of a 
larger, half-point reduction in the Fed's key rate.

   After the Fed's last meeting Oct. 28-29, several policymakers said they 
would prefer to keep rates unchanged at the December meeting, leading Wall 
Street investors to briefly downgrade the odds of a third rate cut to less than 
30%. But then John Williams, president of the New York Fed, said that this 
year's uptick in inflation appears to be a temporary blip driven by Trump's 
tariffs that would likely fade by the middle of 2026.

   As a result, "I still see room for a further adjustment" in the Fed's 
short-term rate, Williams said. As president of the New York Fed and vice chair 
of the rate-setting committee, Williams gets to vote on every interest rate 
decision and is close to Powell. Analysts said it was unlikely Williams would 
have made such a statement without Powell's support. Investors rapidly lifted 
the odds of a cut, which now are at 89%, according to CME Fedwatch.

   "You're seeing the power of the chair," said Nathan Sheets, chief global 
economist at Citi and also a former top Fed staffer. "Members of the committee, 
my instinct is, are wanting to underscore their support for Powell."

   Powell has come under relentless attack from Trump, who just last month said 
he would "love to fire his ass" and called Powell "this clown."

   The Fed is required by Congress to seek low inflation and maximum 
employment, two goals that are potentially in conflict.

   For now, Powell and many other Fed officials are more concerned about hiring 
and unemployment rather than inflation. While the official government jobs 
reports have been delayed, in September the unemployment rate ticked up to 
4.4%, the third straight increase and the highest in four years.

   Payroll provider ADP, meanwhile, reported that in November, its data showed 
companies shed 32,000 jobs. And many large firms have announced sweeping 
layoffs.

   Worries that the job market could get worse are a key reason a rate cut in 
December is likely -- but not necessarily beyond that. Fed officials will have 
up to three months of backlogged jobs and inflation data to consider when they 
meet in late January. Those figures could show inflation remains stubbornly 
high or that hiring has rebounded, which would suggest further cuts aren't 
needed.

   "What they may end up agreeing to do is cut rates now, but give some 
guidance ... that signals that they're on pause for a while after that," Kathy 
Bostjancic, chief economist at Nationwide, said.