The Fed is increasingly torn over a December rate cut

The path for interest-rate cuts has been clouded by an emerging split within the central bank with little precedent during Federal Reserve Chair Jerome Powell's nearly eight-year tenure.

- Nick Timiraos

Officials are fractured over which poses the greater threat—persistent inflation or a sluggish labor market—and even a resumption of official economic data may not bridge the differences.

The rupture has complicated what looked like a workable plan less than two months ago, though investors think a rate cut at the Fed’s next meeting is still more likely than not.

When policymakers agreed to cut rates by a quarter of a percentage point in September, 10 of 19 officials, a slim majority, penciled in cuts for October and December. Cutting rates at three consecutive meetings would echo the downward adjustments Powell made last year and in 2019.

But a contingent of hawks questioned the need for further reductions. Their resistance hardened after officials reduced rates again in late October to the current range between 3.75% and 4%. The debate over what to do in December was especially contentious, with hawks forcefully challenging the presumption of a third cut, according to public comments and recent interviews.

Indeed, a key reason Powell pushed back so bluntly against expectations of such a cut at the press conference that day was to manage a committee riven by seemingly unbridgeable differences.

The split was exacerbated by the government shutdown, which turned off the employment and inflation reports that can help reconcile such disagreements. The data void allowed officials to cite private surveys or anecdotes that reinforced earlier assessments.

The dynamic reflected two contingents growing louder and a center with less conviction. Doves worried about labor-market softness but lacked new evidence that would maintain a strong case for cutting.

Hawks seized the opportunity to argue for a pause. They pointed to steady consumer spending and signaled concern that businesses were preparing to pass along tariff-related price increases.