A Divided Federal Reserve and the December Decision
With a more fragmented Federal Reserve than in previous months, the December decision could mark a turning point in the monetary cycle. Will the Federal Open Market Committee (FOMC) opt for a new cut or a strategic pause due to the lack of data?
Divergent Views Within the Fed
Following the September meeting, the diversity of viewpoints within the Fed became evident as different officials spoke at forums and conferences. It’s not unusual for committee members to interpret the same data from different perspectives. However, the extent of the current disagreement is particularly striking.
The reason? The divergence seems to stem from differing perceptions of the natural rate of interest, that level where interest rates neither stimulate nor restrain the economy.
In September, FOMC’s long-term projections placed this rate between 2.63% and 3.88%, with a median of 3%. Nine members placed it above this level—four of them at 3.5% or higher—while six saw it below. This dispersion is not a minor detail: it inevitably conditions stances on the appropriate degree of monetary restraint.
For those members who estimate the natural rate to be below 3%, the current policy—even after October’s last cut—remains over 100 basis points restrictive. Conversely, for those who position it at 3.5% or higher, the policy is barely slightly contractionary, and further stimulus would be hard to justify in an inflation-close-to-3% context.
Jerome Powell’s Stance
During the post-October decision press conference, Jerome Powell seemed to endorse this reading by acknowledging “strongly divergent” opinions on the appropriate monetary policy course and emphasizing that another cut in December is “far from a foregone conclusion.”
Factors Influencing the December Decision
The decision in December will likely depend on two factors: the fiscal outlook—particularly, whether the federal government can fully reopen—and the evolution of lagging economic data. In this context, further cuts would be hard to justify while inflation remains above the target and the labor market shows no more pronounced deterioration.
Reasons for a Potential Pause
- Economic Strengthening in 2026: The recent labor market weakness appears more a reflection of business caution—a tactical pause amidst uncertainty on taxes, tariffs, and regulation—than a genuine contraction. It could also reflect structural employment reconfiguration rather than cyclical deterioration. If so, a scenario like this would justify a moderately restrictive monetary stance, with the Fed adopting a wait-and-see approach for much of 2026, as seen in extensive parts of 2025.
- Exaggerated Concerns about Fed Independence: While the Committee’s direction will partly depend on who President Trump appoints as the next chair, the anticipated composition of voting members for the upcoming year could act as a significant counterbalance, preserving technical orientation and preventing politically driven monetary policy.
Ultimately, the Fed’s reactive function is expected to continue being guided by what benefits the economy rather than White House preferences.
The December Meeting: A Divided Fed
The December meeting arrives with a divided Fed, marked differences between those fearing inflation uptick or labor market deterioration, and a possibly overconfident market anticipating a rate near 3% by late 2026. The big question is whether the Committee will opt for an additional step or decide to pause and evaluate the accumulated effects of policy due to a lack of recent information.
In this environment of persistent inflation and mixed activity signals, the later the federal government’s reopening, the faster new-cut arguments lose weight, making each Fed decision less a technical reaction and more a bet on the future direction of the U.S. economy.
*Head of Quantitative Models, BBVA Asset Management
