Fed Officials Are Divided on Next Rate Cut—and Government Reopening May Not Settle the Debate

Federal Reserve policymakers appear increasingly divided over whether to cut interest rates again in December, and even the resumption of federal economic reports as the government reopens may not settle the debate.

Last month, after the rate-setting Federal Open Market Committee voted to cut rates for the second time in a row, Chair Jerome Powell acknowledged deep divisions on the panel, saying "there were strongly differing views about how to proceed in December."

The federal data blackout during the government shutdown has contributed to discord on the FOMC, with Powell comparing the situation to "driving in the fog."

On Wednesday, White House press secretary Karoline Leavitt said it was unlikely that the October reports on inflation and employment will ever be released.

"All of that economic data released will be permanently impaired, leaving our policymakers at the Fed flying blind at a critical period," she told reporters.

The growing tensions on the FOMC are between those who want higher rates (hawks) and fear further rate cuts will reignite the embers of lingering inflation, and those who want lower interest rates (doves) and worry that weakness in the labor market will accelerate without swift additional rate cuts.

Fed Gov. Stephen Miran, recently appointed by President Donald Trump, has emerged as the most extreme dove, after dissenting in favor of larger half-point rate cuts at the last two meetings.

Miran has already declared that he plans to vote for a jumbo cut again in December, telling CNBC that he views such a cut as "appropriate" but views a quarter-point cut as the bare minimum needed.

Meanwhile, Kansas City Fed President Jeff Schmid has dug in his heels on the hawk side, voting against any rate cut at the last meeting and issuing a statement arguing that any weakness in the job market is due to factors outside the Fed's control, such as changing technology.

"By my assessment, the labor market is largely in balance, the economy shows continued momentum, and inflation remains too high," Schmid said in a statement explaining his dissent.

The government shutdown has deepened the divide. With key federal economic data releases suspended, FOMC members lack a common point of reference on key trends in the economy.

"Without official data serving as a 'source of truth', policymakers are left weighing a patchwork of alternative data and anecdotes," says Realtor.com® senior economist Jake Krimmel. "In that kind of vacuum, it’s easy for each FOMC contingent to find data that confirms its priors."

With the House set to vote on a spending bill to reopen the government Wednesday night, the federal data blackout could soon lift. But unless the resumed economic reports contain shocking surprises, they may not resolve the divisions on the FOMC.

"The incoming data could settle the debate if inflation eases or job growth weakens, but the most likely outcome in my opinion is slightly higher core inflation and slower hiring, which might deepen the divisions and the policy uncertainty heading into December," says Krimmel.

"Everyone knows the labor market has softened, but for the more hawkish members, it’s really about whether inflation looks safe enough to justify another cut without reigniting price pressures," he adds.

Krimmel believes that new data on inflation will be the most significant factor for December. If inflation reports point to more persistent inflation in services, rather than a one-time tariff bump in goods, it could strengthen the resolve of hawks on the FOMC.

Projections from the Cleveland Fed suggest that a key inflation measure is currently near 2.9%, well above the Fed's 2% target, which will bolster the case for pausing in December.

Meanwhile, the Chicago Fed is already projecting a slower pace of job growth, so if the official data comes in even weaker, it would strengthen the case for a December cut.

"Jobs data matter too, but really only on the downside," says Krimmel. "Alarm bells could ring if hiring is down sharply or there’s an unexpected rise in unemployment." 

Currently, financial markets estimate a 65% probability that the Fed will cut rates by a quarter point in December, according to CME FedWatch.

That's down from more than 90% before the cracks in the FOMC became apparent last month. Further changes to the outlook have the potential to affect mortgage rates as the next meeting approaches.

"On mortgage rates, I would expect them to continue moving sideways," says Krimmel. "Rates have already come up a decent amount since Powell hinted at a December pause, so I really do think the markets—like the Fed itself—are in wait and see mode."

After the government reopens, key inflation and jobs reports will likely trickle out over the following days and weeks, as federal economists catch up on more than a month of backlogged data.

"Until we all get a fuller data picture, it will be hard to forecast what investors or the Fed will do," says Krimmel.