The Federal Reserve's game plan on interest-rate cuts keeps shifting

Investors widely expect a third-in-a-row rate cut this week. Officials are ready to slow—or even stop—lowering rates after that.

- Nick Timiraos

Federal Reserve Chair Jerome Powell had to reassure some skeptical colleagues that the central bank wouldn't inadvertently send signals of distress when he led them to start lowering borrowing costs at the end of the summer with a gutsy, larger-than-usual half-point reduction.

Now, they are confronting another potential hinge point. Officials lowered their benchmark rate again in November, by a quarter point. Investors widely expect a third consecutive rate cut this week.

Powell is trying to find the right gear amid signs the labor market is less wobbly and inflation is a touch firmer than they appeared in September. He faces misgivings from some colleagues over continuing to cut and less conviction from others who strongly backed those first two moves.

One option this week would be to cut by a quarter point, then use new economic projections to strongly hint that the central bank is ready to go more slowly on the reductions.

"Right now, either a cut or a hold could be justified," said Jon Faust, who served as a senior adviser to Powell from 2018 until earlier this year. What officials say about the path of the fed-funds rate is likely to be "more important than whatever they decide about the December meeting in particular."

The fed-funds rate influences borrowing costs throughout the economy, including rates on mortgages, credit cards and auto loans. Raising it tends to curb hiring, spending and investment, while lowering it spurs such activity. But those effects work with what economists call long and variable lags, which means central bankers might not know for a year or more if they have tightened too much or too little.

Going too far, or not far enough

A few officials have suggested they would argue against cutting this week. These "hawks" are fearful of squandering the Fed's credibility by allowing inflation to remain well above their target for a fourth or fifth year.