The Federal Reserve's hawkish rate cut as scheduled, internal disagreements are widening, with only one more cut expected in 2026

The Federal Reserve (Fed) conducted its third rate cut of the year as market expectations suggested, but unprecedented internal disagreements behind this policy adjustment have emerged. The Federal Open Market Committee (FOMC) approved a 0.25 percentage point rate cut with a vote of 9 to 3, lowering the target range to 3.5% to 3.75%. Although this was seen as a “hawkish rate cut,” the Fed also signaled a highly cautious attitude toward further easing in the future, and market expectations for rate cuts next year are cooling rapidly.

Three officials opposed the decision, revealing internal rifts within the Fed

This voting outcome was the first time since September 2019 that three officials opposed the measure, reflecting significant disagreement on policy direction. Dovish-leaning Governor Stephen Miran supported a 0.5 percentage point cut, while steadfast “hawks” Jeffrey Schmid, President of the Kansas City Fed, and Austan Goolsbee, President of the Chicago Fed, voted to hold steady.

Miran is set to leave in January next year, marking his third consecutive “no” vote, while Schmid has opposed rate cuts for the second time in a row, further indicating clear divisions within the Federal Reserve on interest rate policy.

The language of “following the rule” returns to the 2024 tone, implying a pause in rate cuts

In the post-meeting statement, the Fed revisited the language from December 2024: “When considering whether to further adjust the target range for the federal funds rate, the Committee will carefully evaluate new data, economic outlook, and risk balance.” This wording was interpreted at the time as a sign of a pause in rate cuts, which was indeed followed by rate reductions only in September 2025.

Chair Powell stated at the press conference that this rate cut positions the Fed “favorably” in terms of policy, and that the economy will be monitored to decide whether further adjustments are needed.

U.S. stocks rise, bond markets remain muted, market absorbs “last rate cut” expectations

Following the rate decision, U.S. stocks responded positively, with the Dow Jones Industrial Average rising nearly 400 points. However, bond markets reacted calmly, with long-term U.S. Treasury yields remaining almost unchanged, indicating persistent market doubts about future policy directions.

Focus shifts to policy outlook beyond 2026. According to the latest “dot plot” projections, officials generally expect only one more rate cut in 2026 and another in 2027, with long-term rates maintained around 3%. This aligns with September forecasts but further highlights internal disagreements: seven officials do not believe rates should be cut in 2026, and four non-voting officials expressed “soft opposition” to this decision.

Economic data: GDP outlook raised, inflation remains above target

On the economic front, the FOMC upgraded its GDP growth forecast for 2026 from 1.8% to 2.3%, showing increased confidence in economic resilience. However, inflation expectations remain pessimistic, with forecasts indicating rates won’t return to the Fed’s 2% target before 2028.

According to the latest September data, the preferred core inflation indicator shows an annual increase of 2.8%, still above the peak inflation period but below the target range.

Unexpected move! Fed restarts bond purchases to address short-term liquidity pressures

In addition to rate adjustments, the Fed announced it will begin repurchasing government bonds this Friday, initially buying $40 billion worth of short-term Treasury securities. It is expected to maintain a high level of bond purchases for several months before gradually tapering.

This move echoes the “stop balance sheet reduction” policy discussed at the October meeting, driven by rising concerns over overnight funding market pressures. The Fed’s action is seen as an emergency liquidity measure to stabilize the financial system.

Powell’s term winding down, market watches for successor

The Fed is currently in a sensitive period of policy and personnel transitions. Powell has only three FOMC meetings left before his second term ends, and President Trump has explicitly indicated that he will favor appointing a new chair inclined toward low interest rates.

The market widely bets that Kevin Hassett, Director of the National Economic Council, will become the next Fed Chair. As of Wednesday morning, the Kalshi platform shows a 72% probability of his nomination. Support for other candidates like former Governor Kevin Warsh and current Governor Christopher Waller is significantly lower.

Government shutdown impacts decision-making, Fed proceeds amid “incomplete information”

It is noteworthy that the Fed has been making decisions recently amid limited data. The U.S. government shutdown caused delays and gaps in key economic data until the government resumed operations on November 12, allowing for data completion.

Although the Fed observes a “low employment, low layoffs” phenomenon in the labor market based on existing data, a report from Challenger, Gray & Christmas indicates that by November, U.S. companies announced over 1.1 million layoffs, casting a shadow over the job market in the coming months.

This article “Fed’s On-Time Hawkish Rate Cut” with internal disagreements and only one expected rate cut in 2026 was first published on Chain News ABMedia.