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The Federal Reserve is set to cut interest rates next week despite deep divisions among its officials on the direction of the US economy, according to leading academic economists.
The rate-setting Federal Open Market Committee meets on Tuesday, with the vast majority of investors expecting the US central bank to lower US borrowing costs by a quarter point for the third meeting in a row the following day.
Most of the economists polled by the Chicago Booth Clark Center on behalf of the Financial Times agree with the markets’ view, with 85 per cent of the 40 respondents agreeing that the Fed will ease borrowing costs in response to fears the US labour market is weakening.
However, they think the committee will almost certainly be divided on a move that looks set to leave the US central bank’s benchmark federal funds target range at its lowest level in more than three years. This comes amid mounting concerns that ordinary Americans are facing affordability pressures due to higher costs.
FOMC members have spent the run-up to the final vote of 2025 debating whether to prioritise a weakening US labour market over an inflation rate that has been above the central bank’s 2 per cent goal since the spring of 2021.
Several regional Fed presidents have said that, although they had not supported the Fed’s previous rate cut in October, they would back one next week because of concerns that inflation in the dominant services sector was creeping up. This is at a time when the full impact of US President Donald Trump’s tariffs on the price of US imports is yet to be felt, they say.
New York Fed president John Williams signalled late last month that he and other leading members of the committee would back another quarter-point cut as insurance against a further slowdown in the US labour market.
Just one respondent to the FT-Chicago Booth poll said the 12 voting members of the FOMC would be able to overcome their differences and back a rate cut in unison. Sixty per cent of respondents thought there would be two dissents, with another third expecting three or more.
“If the rationale for the dissent is that they are missing their inflation target, then this can improve the credibility of the target,” said Stephen Cecchetti, a professor at Brandeis University. “At the same time, significant division — whether or not they vote against the decision — raises questions about the FOMC’s collective goals.”
There have not been more than two dissenting votes cast at an FOMC meeting since September 2019. The last time there were more than three was in 1992.
The most likely candidate to vote against a rate cut is Kansas City Fed president Jeff Schmid, who also dissented in October. Susan Collins, president of the Boston Fed, and Chicago’s Austan Goolsbee have indicated that they could join Schmid in voting against the consensus this time around.
Fed governor Michael Barr has also signalled he believes there is little room to lower borrowing costs. His counterpart on the board, Stephen Miran, will almost certainly call for a jumbo 50 basis point cut again.
Miran, a close ally of Trump, shares the US president’s desire for borrowing costs to fall rapidly.
After several strong years, many on the FOMC think the US labour market is beginning to cool. The latest Bureau of Labor Statistics report showed an unexpectedly high number of jobs were added to the world’s largest economy in September. But unemployment has edged up, and more recent private sector data shows US businesses are firing more workers.
Many respondents to the poll agreed with the FOMC’s hawks that the US central bank needed to focus more on the fight against inflation than maintaining a strong labour market.
Forty-eight per cent thought that controlling prices should be the priority, against 5 per cent who thought the focus should be on jobs. The rest wanted both sides of the Fed’s dual mandate to be given equal weight.
“I would prefer that the US drop the dual mandate in favour of one that solely focuses on inflation,” said Deborah Lucas, a professor at the Massachusetts Institute of Technology. “A direct link for a strong effect of monetary policy on employment has not been empirically well established.”
While hawks also point to relatively strong US growth, doves highlight that the US economy is heavily reliant on a boom in AI and AI-adjacent activity that has driven capital spending and helped prop up retail spending on the back of higher valuations for tech stocks.
The respondents were also asked what a 20 per cent drop in the value of the benchmark S&P 500 stock index would do to the US economy. A third said the subsequent fall in consumption and investment would trigger a US recession, while almost two-thirds said US growth would weaken, but not by enough to trigger a serious slowdown.
Additional data visualisation by Ian Hodgson and Carolina Vargas
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