The Federal Reserve is the “most divided in six years” as its open market committee (FOMC) members vote for a 25bps cut.
The Federal Reserve delivered a widely expected 25 basis point rate cut on Wednesday in the US to a range of 3.5-3.75 per cent from 3.75-4 per cent.
Chair Jerome Powell emphasised that the policy rate is now in a neutral range, leaving the Fed well-positioned to observe how the economy performs. He noted weakness in the labour market and mentioned that excess inflation is largely due to tariffs at this point.
It was another divided vote between members but the split of 9 to 3 was narrower than typical FOMC decisions, as officials seek clearer signals on the direction of the job market and inflation.
It is understood divisions between committee members are widening with Stephen Miran calling for a 50bps cut while Austan Goolsbee and Jeffrey Schmid voted against any cut.
Antipodes chief investment officer Jacob Mitchell highlighted the scale of dissent at the FOMC meetings.
“It is now the most divided Fed we’ve seen in more than six years. That level of internal disagreement signals heightened policy uncertainty, and policy uncertainty invariably breeds investment uncertainty in crowded parts of the market.”
Blerina Uruci, chief US economist at T. Rowe Price, said the December FOMC meeting was contentious and believed Fed chair Powell did not want to rock the boat or push back on financial markets toward the end of his term.
“My biggest disagreement with the market is the pricing of cuts in H1 2026, which I think is too dovish. If my macro forecast is correct, including that inflation will reaccelerate from Q4 2025 and growth will be solid, then the Fed will not be able to deliver on the market pricing of further easing into next year and will pause its interest rate cuts after the December meeting,” Uruci said.
She added that the path for monetary policy in H2 2026 remains “highly uncertain,” depending not only on macro data but also on the reaction function of the new FOMC leadership.
“National Economic Council’s director Kevin Hasset has been talked about as a likely candidate for the next Fed chair. He is expected to provide a strong push to deliver more dovish monetary policy in H2 2026.”
Ray Sharma-Ong, deputy global head of multi-asset bespoke solutions at Aberdeen Investments, said markets entered the FOMC meeting concerned a rate hike might be discussed. Powell’s comment that a hike was “not the base case” removed that risk for now, Sharma-Ong observed.
“In our view, the Fed is caught between a rock and a hard place, with inflation still elevated despite softening labour markets.”
He added that beyond this immediate relief, Fed monetary policy is no longer a catalyst for markets.
“The bar for further cuts is very high, implying that the policy landscape is likely to remain static for some time.”
Antipodes Partners said they were unsurprised by the Fed’s rate cut.
Mitchell said: “While headline economic indicators have remained relatively resilient, there have been points of weakness under the hood, notably a softening labour market characterised by low hiring and low firing, as opposed to widespread layoffs.”
The firm believes muted job creation – and, as a result, moderating consumption – is containing inflationary pressures, giving the Fed latitude to cut rates to support growth.
“But the critical question is whether inflation will remain sufficiently subdued to justify further rate cuts. There is a disconnect emerging with US equities priced at 24x forward earnings. This is not only a significant premium to the rest of the world, but a 40% premium to its own long-term average of around 17x,” Mitchell said.
“This valuation premium appears increasingly at odds with the economic uncertainty that has prompted the Fed’s more accommodative stance.”
PIMCO economist Tiffany Wilding said bond yields moved modestly lower as Powell declined to provide a firmer signal that the Fed does not expect to cut again, instead embracing data dependence.
“Additionally, the Fed also announced technical adjustments to its balance sheet and repo programs to address recent volatility in money market rates. Powell emphasised this is technically driven and should not be misinterpreted as QE,” Wilding said.
She highlighted the delicate balancing act the Fed faces: curbing inflation while supporting the labour market so households feel economically secure.
“This press conference may have set the stage for the Fed to remain on hold for the duration of Powell’s tenure as chair in 2026. However, if the better growth expected in early 2026 fails to stabilize the increasingly soft US labor market, the Fed is well positioned to cut rates. And even if downside risks are avoided, the Fed is still likely to be able to eventually resume gradual rate cuts under a new chair as inflationary pressures ease in late 2026.”
