The Fed: A house divided?

As expected, the Fed cut rates by 25 bp in Wednesday’s meeting, the third rate cut this year. However, three officials dissented—two (Goolsbee, Schmid) disagreed with the cut, while one (Miran) wanted a 50 bp cut. Three-person dissents are unusual in the FOMC; there have only been five in the past 25 years. What’s more, disagreement within the FOMC seems to be rising. What’s going on? Well, it’s complicated. 

Entering the December meeting, the Federal Reserve remained somewhat divided—the three previous meetings had 1-2 dissents each. While some members advocated for additional rate cuts to cushion a cooling labor market, others warned that inflation demanded restraint. Bond markets priced a 90% chance of a 25 bp cut, yet Powell had emphasized that a December cut was not a "foregone conclusion."  

This divide within the Fed stems from a mix of economic, structural, and political factors that has made consensus hard to achieve. Firstly, conflicting economic signals reinforced divergent views. Robust consumer spending and high inflation, paired with slow hiring and rising unemployment, pulled policymakers in opposite directions. 

Secondly, the recent government shutdown delayed key inflation and jobs data, leaving policymakers to act on incomplete information.   

For markets, a Fed divided increases policy uncertainty. This may cause heightened asset volatility, especially in fixed income, as participants struggle to price the opaque path of policy. Asset allocators must maintain tactical flexibility while upholding strategic themes to navigate a policy landscape where consensus is hard to come by. 

Julia Rozenfeld contributed to this article.