Economist: The Federal Reserve will cut interest rates by 25 basis points next week, but the vote is now divided and will cut interest rates twice next year

The Zhitong Finance App learned that a recent survey of economists shows that the Federal Reserve is expected to cut interest rates again next week to prevent the risk of a sharp deterioration in the labor market. Meanwhile, the median forecasts of respondents show that the Federal Reserve will suspend action after cutting interest rates next week, start cutting interest rates again in March 2026, and will cut interest rates twice by 25 basis points each throughout 2026.

Most economists expect the Fed to cut interest rates twice next year

The results of this survey are in line with the interest rate market's expectations for the Fed to cut interest rates. According to CME's “Federal Reserve Watch” tool, traders believe that the probability that the Fed will cut interest rates by 25 basis points next week will reach 87.2%. The probability of cutting interest rates by 50 basis points by the end of 2026 is 29.3%, reducing the federal funds rate to 3.00%-3.25%.

The vast majority of respondents expect that the Federal Reserve will once again state “the downside risks faced by the job market in recent months have increased” next week. This statement will be the same as the Federal Reserve's statement in October.

Scope Ratings economist Dennis Shen said, “The dovish within the Federal Reserve seems to have a slight advantage. If the Federal Reserve does cut interest rates again (next week), we expect Federal Reserve Chairman Powell to emphasize that action will be suspended thereafter and await further economic signals.”

Federal Reserve policymakers are seriously divided over the risk balance of its dual mission of price stability and full employment. Some regional Federal Reserve presidents are concerned about continued inflation, as price increases brought about by tariffs are being transmitted to consumers. Other regional Federal Reserve presidents believe that there is still room to cut interest rates again to support the job market.

The series of economic data released since the Federal Reserve's last policy meeting did not provide much clear guidance to policy makers. Despite large companies including Verizon (VZ.US) and Amazon (AMZN.US) announcing large-scale layoffs in recent months, the number of weekly initial jobless claims remains low. Meanwhile, the US Bureau of Labor Statistics warned after a record shutdown of the US federal government that it would take some time to resume publishing economic data on a regular basis. The much-publicized US non-farm payrolls report for November was originally scheduled to be released on Friday, but was delayed due to the government shutdown, and is now scheduled to be released on December 16.

The survey of 41 economists was conducted from November 28 to December 3. Most respondents said that the significant weakness in the job market remains a major challenge for policy makers. Only 18% of respondents think more meaningful inflation is a greater risk.

The Federal Reserve will also release its latest economic forecast next week. According to the median forecasts of the respondents, they expect the Federal Reserve to slightly raise their forecasts for this year's economic growth and lower their inflation estimates. The forecast for the 2026 unemployment rate may also be slightly raised.

There are serious differences within the Federal Reserve, and a negative vote is imminent

After cutting interest rates by more than 100 basis points during this easing cycle, Fed policymakers are now thinking about where to stop cutting interest rates, and find that their differences are greater than ever. Over the past year or so, the predictions of where interest rates should eventually fall have been divided the most since at least 2012 (when the Federal Reserve began publishing relevant estimates). Combined with conflicting opinions expressed by policymakers in public speeches about the prospects for interest rate cuts, it has intensified a rare public split over whether interest rates should be cut again next week and how they should be handled later.

Powell has acknowledged that there are “strong differences” within the Federal Open Market Committee (FOMC) over which of the two goals — price stability and full employment — should be prioritized. The central question is whether the economy needs more stimulus to support the job market, or should policymakers slow down the pace of cutting interest rates because inflation is higher than target and tariffs are likely to push up inflation further.

Surveys of economists also reflect this division. The vast majority of respondents expect next week's vote to be divided again as differences within the Federal Open Market Committee intensify. After voting against interest rate cuts in October, Kansas Federal Reserve Chairman Schmid is expected to vote again against interest rate cuts at next week's meeting. More than one-third of respondents also believe that St. Louis Federal Reserve Chairman Mussalem will also vote against interest rate cuts because he recently expressed concerns about inflation.

Meanwhile, US Federal Reserve Governor Milan, appointed by Trump, is expected to vote again against cutting interest rates by 25 basis points and advocating cutting interest rates by 50 basis points. Previously, he had objections at both the September and October policy meetings.

Under Powell's leadership, the Federal Reserve has been making monetary policy decisions through consensus in recent years. But as Trump continues to exert his influence on the Federal Reserve, the Federal Reserve is becoming increasingly divided. The survey showed that almost all respondents believed that the FOMC was moving towards a decision-making process characterized by majority principles. However, as to whether most Federal Reserve policy meetings in 2026 will have an objection vote, the interviewees each accounted for half of their opinions.

Most economists believe that when Powell's term as chairman of the Federal Reserve ends in May next year, the Trump administration will choose US National Economic Council Director Kevin Hassett to take over this important position. Trump said earlier this week that he plans to announce his candidate for the Federal Reserve Chairman in early 2026, and the final candidate has now been determined. In recent days, he has praised Hassett several times and hinted that he might be nominated.

However, if selected from the list of candidates for US Federal Reserve Chairman previously revealed by the US Treasury, most economists said that Federal Reserve Governor Waller would be the best candidate. Thomas Simmons, a senior economist at investment bank Jefferies, said, “Waller has the institutional knowledge and experience as a board member of the Federal Reserve. He might also have better working relationships with other FOMC members. However, we have no reason to think Hassett was a bad choice.”

It is worth mentioning that Gregory Peters, co-chief investment officer of the fixed income division of global insurance asset management giant PGIM, recently said that even if Hassett is approved as the next chairman of the Federal Reserve, he may not be able to achieve the rapid pace of interest rate cuts expected by Trump. Outsiders generally speculate that after being appointed Chairman of the Federal Reserve, Hassett may cut interest rates drastically to please Trump. However, Peters pointed out that since the Federal Reserve's interest rate decision is ultimately decided by the Committee, Hassett cannot fulfill this demand alone. He said, “Does Hassett have enough credibility within the Commission to drive consensus? We don't know the answer. I don't think he has this kind of credibility, which is a signal the bond market is sending us.”