A recent survey of economists indicates that the Federal Reserve is likely to cut interest rates by 25 basis points next week to mitigate rising risks of a sharp deterioration in the labor market. According to the median forecast, the Fed will pause after next week's cut before resuming rate reductions in March 2026, with two additional 25-bps cuts expected throughout the year.
The majority of economists anticipate two rate cuts in 2026, aligning with market expectations. CME Group's FedWatch Tool shows an 87.2% probability of a 25-bps cut next week and a 29.3% chance of a cumulative 50-bps reduction by year-end, bringing the federal funds rate to 3.00%-3.25%.
Most respondents expect the Fed to reiterate its October statement that "downside risks to the labor market have increased in recent months." Dennis Shen, an economist at Scope Ratings, noted, "The Fed’s dovish faction appears to have a slight edge. If they cut rates again, Chair Powell will likely emphasize a pause afterward, pending further economic signals."
The Fed remains deeply divided over balancing its dual mandate of price stability and maximum employment. Some regional Fed presidents worry about persistent inflation due to tariff-driven price pressures, while others argue for further cuts to support employment.
Recent economic data has provided little clarity. Despite mass layoffs at companies like
The survey of 41 economists, conducted November 28–December 3, found that most view labor market weakness as the primary challenge, with only 18% citing inflation as the greater risk. The Fed is also expected to slightly raise its 2025 growth forecast while lowering inflation estimates and possibly nudging up its 2026 unemployment projection.
**Deep Divisions Within the Fed** After cutting rates by over 100 bps in this easing cycle, policymakers are debating where to stop, with disagreements more pronounced than ever. Disparate views on the terminal rate and public remarks have fueled rare dissent over whether to cut again next week and how to proceed afterward.
Chair Powell has acknowledged "strong differences" within the FOMC on prioritizing inflation versus employment. The core debate centers on whether more stimulus is needed for jobs or if tariff-driven inflation warrants slower easing.
The survey reflects this split, with most expecting dissent in next week’s vote. Kansas City Fed President Schmid, who opposed October’s cut, is likely to dissent again. Over a third of respondents also foresee St. Louis Fed President Musalem voting against due to inflation concerns. Meanwhile, Trump-appointed Governor Mester may push for a 50-bps cut, having dissented in September and October.
Under Powell, the Fed has traditionally sought consensus, but divisions are widening amid political pressure. Nearly all respondents believe the FOMC is shifting toward majority-based decisions, though opinions are split on whether dissent will persist in 2026.
**Leadership Uncertainty** Most economists predict Trump will nominate NEC Director Kevin Hassett as the next Fed chair when Powell’s term ends in May 2026. Trump has recently praised Hassett, hinting at a possible nomination. However, if selecting from the Treasury’s shortlist, many see Governor Waller as the stronger candidate.
Jefferies’ senior economist Thomas Simons remarked, "Waller brings institutional expertise and better rapport with FOMC members, though Hassett isn’t a bad choice."
PGIM’s Gregory Peters cautioned that even if Hassett is appointed, he may struggle to deliver Trump’s desired rapid cuts, as decisions require committee consensus. "Does Hassett have the credibility to drive agreement? The bond market suggests not," Peters said.
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